Landmarks in Modern American Business

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Landmarks in Modern American Business

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MAGILL’S C H O I C E

Landmarks in Modern American Business Volume 1 1897–1942 Edited by The Editors of Salem Press

SALEM PRESS, INC. Pasadena, California Hackensack, New Jersey

Copyright © 1994, 2000, by Salem Press, Inc. All rights in this book are reserved. No part of this work may be used or reproduced in any manner whatsoever or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission from the copyright owner except in the case of brief quotations embodied in critical articles and reviews. For information address the publisher, Salem Press, Inc., P.O. Box 50062, Pasadena, California 91115. Essays originally appeared in Great Events from History II: Business and Commerce, 1994; new material has been added. ∞ The paper used in these volumes conforms to the American National Standard for Permanence of Paper for Printed Library Materials, Z39.48-1992 (R1997). Library of Congress Cataloging-in-Publication Data Landmarks in modern American business / edited by the editors of Salem Press p. cm. — (Magill’s choice) Includes bibliographical references and index. ISBN 0-89356-135-5 (set : alk. paper). — ISBN 0-89356-139-8 (v. 1 : alk. paper). — ISBN 0-89356-143-6 (v. 2 : alk. paper). — ISBN 0-89356-149-5 (v. 3 : alk. paper) 1. United States — Commerce — History — 20th century — Chronology. 2. Industries — United States — History — 20th century — Chronology. 3. Corporations — United States — History — 20th century — Chronology. 4. Commercial law — United States — History — 20th century — Chronology. I. Series. HF3021 .L36 2000 338.0973—dc21 00-032962 First Printing

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Publisher’s Note Landmarks in Modern American Business is the first Magill’s Choice title to draw on Salem Press’s popular Great Events from History II books. That series was designed to provide students and general readers with insights into important historical subjects by supplying information in a quickly retrievable format and easy-to-understand style. All but six articles in Landmarks in Modern American Business are taken from Great Events from History II: Business and Commerce, a five-volume set published in 1994. That set contained 374 articles on important businesss-related events and developments that occurrred throughout the world during the twentieth century. In selecting which articles to use in the present set, our first decision was to restrict coverage to the United States. The next decision was to identify articles covering the most significant events—those representing major turning points, or landmarks, in American business and commercial history. Articles in Landmarks in Modern American Business focus on key developments in the evolution of American business and commerce—from the creation of the Dow Jones Industrial Average at the very end of the nineteenth century to the much-anticipated “Y2K” crisis of January 1, 2000, and the court-ordered breakup of Microsoft in mid-2000. Throughout these three volumes, business is defined broadly to include any activity concerned with the production of goods or with the rendering of financial or other services. Commerce involves the exchange of commodities or services. The stages of these activities can be seen as a cycle, from the creation of products or services through marketing, distribution, and sales; and back to investment in product creation, expansion of businesses that produce them, or genesis of new businesses or products. Reflecting the rapidly growing importance of computerization and electronic communications, this set also contains entirely new articles on the addition of Microsoft and Intel to the Dow Jones Industrials in 1999, cable television’s challenge to network television, and the impact of the Internet and World Wide Web on American business. The final article addresses the crisis that was expected to occur when the world’s computer’s shifted over to January 1, 2000. v

Landmarks in Modern American Business

After being bombarded with dire warnings of eminent disaster during the late 1990’s, many people expected that government and commercial mayhem would erupt when millions of unprepared computer clocks throughout the world confronted the year 2000 and did not know what to do with a date not starting with “19.” A new article in Landmarks in Modern American Business, “The Y2K Crisis Finally Arrives,” explains what actually happened. The history of American business and commerce provides a unique perspective on history as a whole, showing how economic forces have shaped the nation and the lives of its citizens. Most of the events covered in these volumes had political or cultural, as well as economic, repercussions. Virtually every essay in this set touches on a wide variety of issues. Landmarks in Modern American Business follows the general arrangement and format of the Great Events II series. Articles are arranged chronologically, by event. Ranging in length from 2,000 to 2,500 words, each of them opens with ready-reference top matter listing the category of the event discussed—from advertising to transportation; the time the event occurred; the locale where it occurred; a brief summary of its significance in the history of business and commerce; and descriptions of principal personages who were key players in the event. The main text that follows is divided into two subsections: Summary of Event describes the event itself and the circumstances leading up to it, and Impact of Event. The latter section analyzes the influence of the event on such issues as the evolution of business practices, the growth of an industry, or national politics—in both the short and long runs. Every article has an annotated and updated Bibliography listing important publications relating to the essay topic. Titles of these publications are chosen for their relevance to the topic in question and their accessibility through to target readers. Finally, each article ends with a list of CrossReferences, identifying other articles in this set on related or similar subjects. At the back of volume 3 of Landmarks in Modern American Business readers will find a variety of indexes that will help them find the articles and information they seek. These include a Chronological List of Events, an Alphabetical List of Events, a Category Index, an index of Principal Personages, and a general Subject Index. All the articles in this set are written and signed by experts in the various fields of business and economics; most contributors are academicians in these fields. A list of the contributors, along with their affiliations, follows this note. Once again, we gratefully acknowledge their participation and thank them for making their expert knowledge accessible to general readers.

vi

Contributors Christina Ashton Independent Scholar

Bill Delaney Independent Scholar

Mark D. Hanna Miami University

Siva Balasubramanian Southern Illinois University at Carbondale

Satch Ejike Independent Scholar

Baban Hasnat State University of New York College at Brockport

Richard Barrett Elmira College Jonathan Bean Ohio State University Bruce Andre Beaubouef University of Houston Jack Blicksilver Georgia State University John Braeman University of Nebraska at Lincoln

Eric Elder Northwestern College Corinne Elliott Independent Scholar Loring Emery Independent Scholar

Frederick B. Hoyt Illinois Wesleyan University

Chiarella Esposito University of Mississippi

Jeffry Jensen Independent Scholar

Daniel C. Falkowski Canisius College

Rajiv Kalra Moorhead State University

John L. Farbo University of Idaho

Anthony Branch Golden Gate University

John C. Foltz University of Idaho

Carmi Brandis Independent Scholar

Andrew M. Forman Hofstra University

Jon R. Carpenter University of South Dakota

Eugene Garaventa College of Staten Island of the City University of New York

Brian J. Carroll California Baptist College Elisabeth A. Cawthon University of Texas at Arlington Edward J. Davies II University of Utah Jennifer Davis Independent Scholar

Sarah Holmes University of Connecticut

Elizabeth Gaydou Jordan College Richard Goedde St. Olaf College

Dan Kennedy Independent Scholar Benjamin J. Klebaner City College of the City University of New York Theodore P. Kovaleff Center for Study of the Presidency Mitchell Langbert Clarkson University Victor J. LaPorte, Jr. University of Central Florida

Nancy M. Gordon Independent Scholar

Martin J. Lecker Rockland Community College

Sam Ramsey Hakim University of Nebraska

Daniel Y. Lee Shippensburg University

vii

Landmarks in Modern American Business Jim Lee Fort Hays State University Jose C. de Leon Society for Technical Communication

Iris A. Pirozzoli University of Wisconsin Patrick D. Reagan Tennessee Technological University

Marie McKendall Grand Valley State University

Betty Richardson Southern Illinois University at Edwardsville

Lewis Mandell University of Connecticut

Joseph R. Rudolph, Jr. Towson State University

S. A. Marino Westchester Community College

Larry Schweikart University of Dayton

James D. Matthews Lynn University Patricia C. Matthews Mount Union College Andre Millard University of Alabama at Birmingham

Arthur G. Sharp Independent Scholar Elaine Sherman Hofstra University Roger Smith Independent Scholar A. J. Sobczak Independent Scholar

Jay Nathan St. John’s University

Robert Sobel Hofstra University

Anthony Patrick O’Brien Lehigh University

Alene Staley Saint Joseph’s College

John F. O’Connell College of the Holy Cross

Timothy E. Sullivan Towson State University

Virginia Ann Paulins Ohio University

viii

Kambiz Tabibzadeh Eastern Kentucky University John R. Tate New Jersey Institute of Technology Paul B. Trescott Southern Illinois University Sharon C. Wagner Missouri Western State College M. Mark Walker University of Mississippi William J. Wallace Monmouth College Theodore O. Wallin Syracuse University William C. Ward III Kent State University Rowena Wildin Independent Scholar Clifton K. Yearley State University of New York at Buffalo Charles Zelden University of Texas at Arlington

Contents Volume 1 Publisher’s Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v List of Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . vii The Wall Street Journal Prints the Dow Jones Industrial Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discovery of Oil at Spindletop Transforms the Oil Industry . . Champion v. Ames Upholds Federal Powers to Regulate Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . The U.S. Government Creates the Department of Commerce and Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . The Supreme Court Strikes Down a Maximum Hours Law . . . Congress Passes the Pure Food and Drug Act . . . . . . . . . . Harvard University Founds a Business School . . . . . . . . . Congress Updates Copyright Law in 1909 . . . . . . . . . . . The Triangle Shirtwaist Factory Fire Prompts Labor Reforms . The Supreme Court Decides to Break Up Standard Oil . . . . . Advertisers Adopt a Truth in Advertising Code . . . . . . . . . Ford Implements Assembly Line Production . . . . . . . . . . The Federal Reserve Act Creates a U.S. Central Bank . . . . . The Panama Canal Opens . . . . . . . . . . . . . . . . . . . . The Federal Trade Commission Is Organized . . . . . . . . . . Congress Passes the Clayton Antitrust Act . . . . . . . . . . . Labor Unions Win Exemption from Antitrust Laws . . . . . . . The United States Establishes a Permanent Tariff Commission . Station KDKA Introduces Commercial Radio Broadcasting . . The A. C. Nielsen Company Pioneers in Marketing and Media Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Supreme Court Rules Against Minimum Wage Laws . . . IBM Changes Its Name and Product Line . . . . . . . . . . . . Congress Restricts Immigration with 1924 Legislation . . . . . The Teapot Dome Scandal Prompts Reforms in the Oil Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

. . . . 1 . . . . 7 . . . . 13 . . . . . . . . . . . . . . . .

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129 135 142 149

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The Railway Labor Act Provides for Mediation of Labor Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . Congress Passes the Agricultural Marketing Act . . . . . . . . The U.S. Stock Market Crashes on Black Tuesday . . . . . . . The Norris-LaGuardia Act Adds Strength to Labor Organizations . . . . . . . . . . . . . . . . . . . . . . . . The U.S. Government Creates the Tennessee Valley Authority The Banking Act of 1933 Reorganizes the American Banking System . . . . . . . . . . . . . . . . . . . . . . . . . . . . The National Industrial Recovery Act Is Passed . . . . . . . . The Securities Exchange Act Establishes the SEC . . . . . . . Congress Establishes the Federal Communications Commission . . . . . . . . . . . . . . . . . . . . . . . . . Congress Passes the Federal Credit Union Act . . . . . . . . . The Wagner Act Promotes Union Organization . . . . . . . . The Social Security Act Provides Benefits for Workers . . . . The Banking Act of 1935 Centralizes U.S. Monetary Control . The CIO Begins Unionizing Unskilled Workers . . . . . . . . The DC-3 Opens a New Era of Commercial Air Travel . . . . Roosevelt Signs the Fair Labor Standards Act . . . . . . . . . The 1939 World’s Fair Introduces Regular U.S. Television Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . Roosevelt Signs the Emergency Price Control Act . . . . . . . The United States Begins the Bracero Program . . . . . . . .

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MAGILL’S C H O I C E

Landmarks in Modern American Business Volume 2 1944–1974 Edited by The Editors of Salem Press

SALEM PRESS, INC. Pasadena, California Hackensack, New Jersey

Copyright © 1994, 2000, by Salem Press, Inc. All rights in this book are reserved. No part of this work may be used or reproduced in any manner whatsoever or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission from the copyright owner except in the case of brief quotations embodied in critical articles and reviews. For information address the publisher, Salem Press, Inc., P.O. Box 50062, Pasadena, California 91115. Essays originally appeared in Great Events from History II: Business and Commerce, 1994; new material has been added. ∞ The paper used in these volumes conforms to the American National Standard for Permanence of Paper for Printed Library Materials, Z39.48-1992 (R1997). Library of Congress Cataloging-in-Publication Data Landmarks in modern American business / edited by the editors of Salem Press p. cm. — (Magill’s choice) Includes bibliographical references and index. ISBN 0-89356-135-5 (set : alk. paper). — ISBN 0-89356-139-8 (v. 1 : alk. paper). — ISBN 0-89356-143-6 (v. 2 : alk. paper). — ISBN 0-89356-149-5 (v. 3 : alk. paper) 1. United States — Commerce — History — 20th century — Chronology. 2. Industries — United States — History — 20th century — Chronology. 3. Corporations — United States — History — 20th century — Chronology. 4. Commercial law — United States — History — 20th century — Chronology. I. Series. HF3021 .L36 2000 338.0973—dc21 00-032962 First Printing

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Contents Volume 2 Roosevelt Signs the G.I. Bill . . . . . . . . . . . . . . . . . . . Truman Orders the Seizure of Railways . . . . . . . . . . . . . The Truman Administration Launches the Marshall Plan . . . . The Taft-Hartley Act Passes over Truman’s Veto . . . . . . . . The General Agreement on Tariffs and Trade Is Signed . . . . . Diners Club Begins a New Industry . . . . . . . . . . . . . . . The First Homeowner’s Insurance Policies Are Offered . . . . The Celler-Kefauver Act Amends Antitrust Legislation . . . . . Congress Creates the Small Business Administration . . . . . . Eisenhower Begins the Food for Peace Program . . . . . . . . The AFL and CIO Merge . . . . . . . . . . . . . . . . . . . . Congress Sets Standards for Chemical Additives in Food . . . . The Landrum-Griffin Act Targets Union Corruption . . . . . . Firms Begin Replacing Skilled Laborers with Automatic Tools The U.S. Service Economy Emerges . . . . . . . . . . . . . . The Agency for International Development Is Established . . . Congress Passes the Equal Pay Act . . . . . . . . . . . . . . . GPU Announces Plans for a Commercial Nuclear Reactor . . . Hoffa Negotiates a National Trucking Agreement . . . . . . . . The Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy . The Civil Rights Act Prohibits Discrimination in Employment . American and Mexican Companies Form Maquiladoras . . . . Johnson Signs the Medicare and Medicaid Amendments . . . . Congress Limits the Use of Billboards . . . . . . . . . . . . . Congress Passes the Motor Vehicle Air Pollution Control Act . Nader’s Unsafe At Any Speed Launches a Consumer Movement . . . . . . . . . . . . . . . . . . . . . . . . . . . Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska . . . . Congress Passes the Consumer Credit Protection Act . . . . . . The United States Bans Cyclamates from Consumer Markets . The Banning of DDT Signals New Environmental Awareness . Health Consciousness Creates Huge New Markets . . . . . . . xvii

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301 309 315 322 329 335 341 348 354 361 368 375 382 389 395 401 408 415 423 429 436 443 451 459 465

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The U.S. Government Reforms Child Product Safety Laws . . Amtrak Takes Over Most U.S. Intercity Train Traffic . . . . . The U.S. Government Bans Cigarette Ads on Broadcast Media Congress Passes the RICO Act . . . . . . . . . . . . . . . . . Congress Passes the Fair Credit Reporting Act . . . . . . . . . The Environmental Protection Agency Is Created . . . . . . . Nixon Signs the Occupational Safety and Health Act . . . . . The United States Suffers Its First Trade Deficit Since 1888 . The Supreme Court Orders the End of Discrimination in Hiring . . . . . . . . . . . . . . . . . . . . . . . . . . . . An Independent Agency Takes Over U.S. Postal Service . . . Nixon Signs the Consumer Product Safety Act . . . . . . . . . The United States Plans to Cut Dependence on Foreign Oil . .

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MAGILL’S C H O I C E

Landmarks in Modern American Business Volume 3 1974–2000 Edited by The Editors of Salem Press

SALEM PRESS, INC. Pasadena, California Hackensack, New Jersey

Copyright © 1994, 2000, by Salem Press, Inc. All rights in this book are reserved. No part of this work may be used or reproduced in any manner whatsoever or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission from the copyright owner except in the case of brief quotations embodied in critical articles and reviews. For information address the publisher, Salem Press, Inc., P.O. Box 50062, Pasadena, California 91115. Essays originally appeared in Great Events from History II: Business and Commerce, 1994; new material has been added. ∞ The paper used in these volumes conforms to the American National Standard for Permanence of Paper for Printed Library Materials, Z39.48-1992 (R1997). Library of Congress Cataloging-in-Publication Data Landmarks in modern American business / edited by the editors of Salem Press p. cm. — (Magill’s choice) Includes bibliographical references and index. ISBN 0-89356-135-5 (set : alk. paper). — ISBN 0-89356-139-8 (v. 1 : alk. paper). — ISBN 0-89356-143-6 (v. 2 : alk. paper). — ISBN 0-89356-149-5 (v. 3 : alk. paper) 1. United States — Commerce — History — 20th century — Chronology. 2. Industries — United States — History — 20th century — Chronology. 3. Corporations — United States — History — 20th century — Chronology. 4. Commercial law — United States — History — 20th century — Chronology. I. Series. HF3021 .L36 2000 338.0973—dc21 00-032962 First Printing

printed in the united states of america

Contents Volume 3 The Employee Retirement Income Security Act of 1974 Is Passed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Congress Prohibits Discrimination in the Granting of Credit . . Jobs and Wozniak Found Apple Computer . . . . . . . . . . . Murdoch Extends His Media Empire to the United States . . . AT&T and GTE Install Fiber-Optic Telephone Systems . . . . The Alaskan Oil Pipeline Opens . . . . . . . . . . . . . . . . . Carter Signs the Airline Deregulation Act . . . . . . . . . . . . The Pregnancy Discrimination Act Extends Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Three Mile Island Accident Prompts Reforms in Nuclear Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Supreme Court Rules on Affirmative Action Programs . . American Firms Adopt Japanese Manufacturing Techniques . . CAD/CAM Revolutionizes Engineering and Manufacturing . . Defense Cutbacks Devastate the U.S. Aerospace Industry . . . Electronic Technology Creates the Possibility of Telecommuting . . . . . . . . . . . . . . . . . . . . . . . . Congress Deregulates Banks and Savings and Loans . . . . . . The Cable News Network Debuts . . . . . . . . . . . . . . . . Reagan Promotes Supply-Side Economics . . . . . . . . . . . Federal Regulators Authorize Adjustable-Rate Mortgages . . . Air Traffic Controllers of PATCO Declare a Strike . . . . . . . IBM Introduces Its Personal Computer . . . . . . . . . . . . . AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . Compact Discs Reach the Market . . . . . . . . . . . . . . . . Firefighters v. Stotts Upholds Seniority Systems . . . . . . . . Home Shopping Service Is Offered on Cable Television . . . . The Supreme Court Upholds Quotas as a Remedy for Discrimination . . . . . . . . . . . . . . . . . . . . . . . . Insider Trading Scandals Mar the Emerging Junk Bond Market xxv

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The Immigration Reform and Control Act Is Signed into Law The U.S. Stock Market Crashes on 1987’s “Black Monday” . Drexel and Michael Milken Are Charged with Insider Trading Mexico Renegotiates Debt to U.S. Banks . . . . . . . . . . . Bush Responds to the Savings and Loan Crisis . . . . . . . . Sony Purchases Columbia Pictures . . . . . . . . . . . . . . . Bush Signs the Americans with Disabilities Act of 1990 . . . . Bush Signs the Clean Air Act of 1990 . . . . . . . . . . . . . The North American Free Trade Agreement Goes into Effect . Cable Television Rises to Challenge Network Television . . . Time Magazine Makes an E-commerce Pioneer Its Person of the Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dow Jones Adds Microsoft and Intel . . . . . . . . . . . . . . Awarding of an NFL Franchise to Houston Raises the Ante . . The Y2K Crisis Finally Arrives . . . . . . . . . . . . . . . . . Federal Court Rules That Microsoft Should Be Split into Two Companies . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . 868

Chronological List of Events Alphabetical List of Events . Category Index . . . . . . . Principal Personages . . . . Subject Index . . . . . . . .

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xxvi

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THE WALL STREET JOURNAL PRINTS THE DOW JONES INDUSTRIAL AVERAGE THE WALL STREE T JOURNAL Prints the Dow Jones Industrial Average

Category of event: Finance Time: 1897 Locale: New York, New York Dow, Jones and Company began publishing its Dow Jones Industrial Average, a measure of the stock prices of important industrial companies, in The Wall Street Journal Principal personages: Charles Henry Dow (1851-1902), a financial analyst and reporter Edward Davis Jones (1856-1920), a reporter and businessperson Charles Milford Bergstresser (b. 1858?), a partner in Dow, Jones and Company Summary of Event Charles Dow, a financial analyst, thought it important that members of the financial community have access to a summary measure of prices on the New York Stock Exchange. He believed that such a measure would aid in predicting financial trends. As cofounder of Dow, Jones and Company (the comma was later dropped from the company name) and cofounder and editor of The Wall Street Journal, he was able to publish various indices and promote his own theories of the behavior of the stock market. At its founding in 1882, Dow, Jones and Company was a news-gathering organization focused on and located in New York City. The company soon expanded its focus to include any major news that would affect the business 1

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community. Coverage of financial news certainly was not new; various publications had discussed the New York Stock Exchange (NYSE) and news connected with it since its founding in 1792. Soon after the founding of that stock market, James Oram began publishing The Shipping and Commercial List and New York Prices Current, stating the facts and news that affected shipping, finance, and commerce in the region. By 1825, this newspaper had been taken over by the Journal of Commerce, which was still being published in 1993. New York had established itself as the financial center of the young nation, and financial news was both created there and disseminated from there. Early business reporting was filled with speculation and rumors. The few hard facts that were available were valuable to investors, and reporters were sometimes paid for delivering information in advance of publication or for holding back information. John J. Kiernan saw a need for speedy and accurate business reporting. He borrowed funds from family and friends and started the Kiernan News Agency, offering subscribers hand-delivered newsletters containing up-to-date information on all aspects of business. Charles Dow began working for the agency in 1880. Several months later, Dow recommended Edward Jones to fill another reportorial position. By 1882, Dow and Jones had struck out on their own, forming Dow, Jones and Company. The new enterprise had a total of six employees and was located at the back of a candy store. In 1883, the company began publishing Customers’ Afternoon Letter, a daily newspaper of two pages. The workload soon became overwhelming, and the company added Charles Milford Bergstresser as a third partner, though his name was not added to the company’s name. By 1889, Dow, Jones and Company had a staff of about fifty, including its first out-of-town reporter, stationed in Boston. The partners realized that their two-page newspaper could not hold all the information that the company gathered; they reorganized the publication as The Wall Street Journal in that year. The paper stated that it aimed to give full and fair information regarding fluctuations in the prices of stocks, bonds, and some commodities and was intended to be a paper of news rather than of opinions. A policy statement further explained that the paper would “give a good deal of news not found in other publications, and will present . . . a faithful picture of the rapidly shifting panorama of the Street.” One of the main ideas developed by Dow and Jones was a composite list of major stocks and an index of their prices. Company publications began carrying lists as early as 1884. The Dow Jones Industrial Average (DJIA), one version of these lists, is generally recognized as having first been published in 1897. That first DJIA averaged the prices of twelve major 2

THE WALL STREET JOURNAL Prints the Dow Jones Industrial Average

companies. The list was expanded to twenty companies in 1916 and to thirty in 1928. The companies included have changed over time, reflecting mergers and dissolutions, but the DJIA is adjusted for such changes so that the index number has the same meaning, with no jumps in its value because of such changes. Charles Dow thought that such an index would be useful as an indicator, or even predictor, of general trends in the market. He promoted the Dow theory of market behavior, which identified primary trends in stock prices and identified types of market fluctuations. Daily fluctuations in a market price index had no significance other than as part of a primary upward or downward trend, or as part of a reaction (a temporary reversal in an upward trend) or rally (a temporary reversal in a downward trend). In identifying primary trends, the theory looks for the market index to move outside (or “break out”) of a set of upper and lower boundaries. The trend continues until a secondary movement confirms that it has ended, as when the bottom of a reaction falls below the level of the previous reaction or the peak of a rally rises above the peak of the previous rally. Dow’s theories found wide followings and were discussed in books by various market theoreticians. The Dow theory was first labeled as such in book form in Samuel Armstrong Nelson’s The ABC of Speculation (1902). After Dow’s death in 1902, William Peter Hamilton, who had worked under Dow, continued to promote the Dow theory. In 1922, his book titled The Stock Market Barometer: A Study of Its Forecast Value Based on Charles H. Dow’s Theory of the Price Movement assessed how the Dow theory had performed since 1897. Robert Rhea later promoted the theory, enlarging its scope to incorporate information on the number of shares traded daily. He emphasized, as had Dow, that the theory was designed as one tool to help read the marketplace, to be used in combination with other indicators and theories rather than on its own. Jones sold out his share of Dow, Jones and Company to his partners in 1899; they sold the company in 1902 to Clarence Barron. The Wall Street Journal continued as primarily a financial newspaper until 1941, when a new managing editor, Bernard Kilgore, broadened the paper’s coverage to major news events and in-depth articles on business. Impact of Event The growth of Dow, Jones and Company, from a two-man organization to a corporation ranked in 1990 among the largest five hundred in the United States and the thousand largest in the world, involved expansion of the firm’s basic business of providing news of the marketplace. Even though the company underwent changes of ownership and expanded its 3

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scope, provision of accurate, timely financial news remained an important part of the company. In a contemporary world filled with different stock markets and theories of them, the DJIA is the most recognizable index of market performance. News of movements in the DJIA is enough to affect prices in markets other than the NYSE, which is the only market measured by the DJIA. The company is best known as publisher of The Wall Street Journal, which branched out into European and Asian editions. The firm’s business publications division also produced Barron’s, a respected business magazine, and the National Business Employment Weekly, among other publications. Business publications, however, accounted for less than half the company’s revenues by 1989. Various information services, including the Dow Jones News/Retrieval on-line computer service and Telerate, an international supplier of up-to-the-minute market data, accounted for most of the remainder. In 1990, for the seventh year in a row, Fortune magazine ranked Dow Jones first in its industry for quality of products and services. Other industrial nations have developed stock markets, and stock market indicators, of their own. The DJIA is unusual in being based on only thirty stocks, with adjustments made when an included company announces a stock split (changing the price of the stock) or when one company’s stock is substituted for that of another, which becomes necessary when companies dissolve. The Japanese stock market is measured by the widely reported Nikkei index. Canada has several different stock markets. The Vancouver market concentrates on mining stocks, while the Toronto exchange closely resembles the NYSE. Even within the United States, several different indices and markets exist. The Standard & Poor’s S&P 500 index, for example, measures the average price level of five hundred individual stocks, thus providing a broader base than does the DJIA. Regional markets such as the Pacific Stock Exchange and the Philadelphia Stock Exchange allow traders to work in cities other than New York, and specialized markets such as NASDAQ (National Association of Securities Dealers Automated Quotations) and the American Stock Exchange allow national trading in stocks not carried on the NYSE. The advent of computerized trading has allowed investors to trade worldwide and around the clock, making the Dow Jones product of current, accurate information all the more important. Stock traders have become increasingly sophisticated, using increasing numbers of tools and amounts of data to make their trading decisions. The Dow theory still forms the background for many theories, and many theories use movements in the DJIA as a predictor of stock market price changes. The NYSE has grown tremendously, making information concerning it meaningful to many more people. During the 1920’s, perhaps five 4

THE WALL STREET JOURNAL Prints the Dow Jones Industrial Average

million shares would change hands on a busy day. By the 1990’s, trading of two hundred million shares daily was common, and many more individuals had entered the market to buy small amounts of stock. Indicators of the markets assumed prominence and even became the subjects of trading. Markets developed for the combinations of stocks on which various indices were based; investors thus could place bets on which direction they thought the market as a whole would move. Advances in the level of the DJIA and other market indices offered data to support the theory that over the long term (depending on the precise period measured), the U.S. stock market usually offered a rate of return on investment higher than rates offered on most alternative investments. The DJIA has attained stature, as have other stock market indices to a lesser degree, as a measure of overall economic activity, something for which it was not intended. Financial writers commonly make reference to the level of the DJIA when referring to future economic prospects or past performance. Although there is a link between stock prices and economic activity—stocks tend to be worth more when companies are profitable, which occurs when business activity is at a high level and unemployment rates are low—the link is far from perfect. The DJIA, however, has become recognized as an important measurement even by those who know almost nothing about financial markets. Bibliography Neilson, Winthrop, and Frances Neilson. What’s News: Dow Jones. Radnor, Pa.: Chilton Book Company, 1973. Provides a history of The Wall Street Journal and the involvement of various individuals in its publication. Discusses content of the newspaper during different eras as well as describing innovations made by the paper. Pierce, Phyllis S., ed. The Dow Jones Averages, 1895-1995. Chicago: Irwin Professional Publications, 1996. Comprehensive history of the DJIA. Rosenberg, Jerry M. Inside The Wall Street Journal. New York: Macmillan, 1982. Gives the newspaper’s history and describes its impact. Shows the evolution of the paper from a two-page newsletter through its ownership by Clarence Barron and beyond, discussing various advances and difficulties. Seligman, Joel. The Transformation of Wall Street. New York: Houghton Mifflin, 1982. Describes the changes that have occurred since the advent of the Securities and Exchange Commission in the 1930’s. More generally discusses the evolution of the financial markets on Wall Street. Stillman, Richard J. Dow Jones Industrial Average. Homewood, Ill.: Dow Jones-Irwin, 1986. A history, with pictures, of Dow, Jones and Company, 5

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focusing on the DJIA. Discusses how the DJIA is computed and describes the contributions of various people to its development and use. Wendt, Lloyd. The Wall Street Journal. Chicago: Rand McNally, 1982. A history of the newspaper and those who headed it at different times. Good on the origins of the paper and its original publishers as well as on the transformation from a New York to a national publication. Carmi Brandis Cross-References The U.S. Stock Market Crashes on Black Tuesday (1929); The Securities Exchange Act Establishes the SEC (1934); Insider Trading Scandals Mar the Emerging Junk Bond Market (1986); The U.S. Stock Market Crashes on 1987’s “Black Monday” (1987).

6

DISCOVERY OF OIL AT SPINDLETOP TRANSFORMS THE OIL INDUSTRY Discovery of Oil at Spindletop Transforms the Oil Industry

Category of event: New products Time: January 10, 1901 Locale: Texas The discovery of oil at the Spindletop field was the beginning of the Texas oil boom and led to the growth of a number of important present-day oil corporations Principal personages: Patillo Higgins (1862-1955), a Beaumont resident, the first to find evidence of petroleum reserves in the area Anthony F. Lucas (1855-1921), an Austrian geologist and engineer, the first to act upon the theory that salt domes in the Gulf Coastal Plains were associated with petroleum reservoirs James M. Guffey (1839-1930), the head of the J. M. Guffey Petroleum Company John H. Galey (1840-1918), the partner of Guffey William L. Mellon (1868-1949), an investment banker who helped finance Guffey Joseph S. Cullinan (1860-1937), a manager of a Standard Oil subsidiary who formed the Texas Fuel Company from discoveries made at Spindletop John D. Rockefeller (1839-1937), the head of Standard Oil Company Summary of Event On January 10, 1901, at 10:30 a.m., the first major “gusher” came in at the Spindletop oil field. Spindletop was named for the salt dome known as 7

Landmarks in Modern American Business

the “Big Hill,” just south of Beaumont in southeastern Texas. This first major oil well at Spindletop at first produced 75,000 to 100,000 barrels per day, approximately 800,000 barrels before it was brought under control nine days after oil was struck. This dramatic discovery made the Spindletop area the first major oil “boom town” of Texas and shifted the focus of petroleum entrepreneurs to Texas. Texas was the leading petroleum producing state in the United States for much of the twentieth century and was one of the fastest-growing areas in terms of population. The Spindletop discovery also led to the formation and development of a number of important oil corporations. Prior to the discovery of oil in Texas, the primary and best-known oil fields were in Pennsylvania. Officials of the Standard Oil Company believed that there were few, if any, productive oil fields west of the Mississippi River. By 1890, however, there was evidence of petroleum in Texas, primarily in Corsicana, just south of Dallas. The opportunity to develop the Corsicana oil fields brought two Pennsylvania wildcatters, James M. Guffey and John H. Galey, to Corsicana. The need to provide pipeline transportation facilities in the area also brought Joseph S. Cullinan of Pennsylvania, head of one of Standard Oil’s pipeline subsidiaries, to Corsicana. The Spindletop discovery, which would dwarf the production at Corsicana, brought these three men and many others to the oil fields of southeastern Texas. These three would form the oil-producing and refining companies that would become Gulf Oil Company and the Texas Company (Texaco). Patillo Higgins, a Beaumont resident, was the first to find evidence of petroleum reserves at the Spindletop salt dome. Higgins, despite receiving ridicule for believing that there were commercial quantities of petroleum in the Spindletop hill, formed the Gladys City Oil, Gas, and Manufacturing Company in 1892 to exploit the oil and gas reserves. Higgins ran out of funds before he had drilled deep enough to reach the oil. In 1899, he placed an advertisement in a trade journal to lease the field. Anthony F. Lucas, an Austrian mining engineer and consultant, answered the advertisement. In his work as a consultant, Lucas had traveled through the Texas and Louisiana Gulf Coast Plains. He often found seepages of petroleum in and around the salt dome formations that occurred throughout the region. Lucas contended that these salt domes were associated with vast reservoirs of petroleum. Lucas drilled a well on Spindletop in 1899. Although he reached some crude oil, he too ran out of funds for the project. Lucas had difficulty obtaining additional financial backing because there was no proof in any of the other oil fields of the world to back up his contention that salt domes were associated with petroleum reservoirs. Through associates in the Uni8

Discovery of Oil at Spindletop Transforms the Oil Industry

versity of Texas geology department, Lucas came into contact with John H. Galey, a partner in the J. M. Guffey Petroleum Company of Pittsburgh. With $400,000 borrowed from the Mellon Bank of Pittsburgh, Guffey, Galey, and Lucas renewed efforts to find oil at Spindletop. On January 10, 1901, these efforts reached fruition. After weeks of continual drilling problems, the drilling crew reached a depth of 1,160 feet. At 10:30 a.m., an oil gusher that could be seen three miles away erupted. In contrast to the first major oil discovery in Pennsylvania in 1859, which flowed at 20 barrels per day with the aid of a pump, the first Spindletop gusher spewed 75,000 to 100,000 barrels per day. In 1902, the Spindletop field produced more than eighteen million barrels of crude oil, which amounted to 20 percent of the production of the United States. This was 93 percent of the year’s national increase in production. By the end of 1902, almost four hundred wells were bunched together at Spindletop. By 1904, that number had reached nearly twelve hundred. The fist six oil wells drilled at Spindletop accounted for more oil than all the other oil wells in the world at that time. Such rapid and massive exploitation of the Spindletop’s petroleum resources, accompanied often by extravagant waste, meant that the petroleum reservoirs in the Spindletop field were rapidly depleted between 1902 and 1904. Such exhaustion of petroleum resources, at Spindletop and later elsewhere in Texas and throughout the nation, would lead to concerns about conservation. In the very early twentieth century, however, at a time of economic opportunity and prosperity, concerns about conservation were rare. William L. Mellon, whose family bank had substantially funded the Guffey operations at Spindletop, soon realized that a greater level of financial and personal involvement was necessary to maintaining profitability and expansion. The Mellons bought out Guffey’s interests and in 1907 removed Guffey as president of the J. M. Guffey Petroleum Company. William L. Mellon was subsequently named president, and the company was renamed the Gulf Oil Company. Cullinan also realized that the opportunities at Spindletop were much greater than at Corsicana. In January, 1902, Cullinan formed the Texas Fuel Company, an organization designed to refine and market the vast amounts of crude oil being produced in the area. Cullinan also formed the Producers Oil Company to ensure his company a continual source of supply. The Texas Fuel Company proved too small to meet the increasingly immense task of refining all the crude produced, and in March, 1902, its assets were transferred to a new corporation, the Texas Company, capitalized at three million dollars. Cullinan’s renown from his days with Standard Oil led to the continual growth and success of the Texas Company at a time when 9

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approximately two hundred competitors and other entrepreneurs at Spindletop were failing. Other major petroleum corporations were born or grew stronger at Spindletop. Shell Oil Company had its origins at Spindletop. The Shell Transport and Trading Company of London had signed a twenty-year contract in which Guffey’s operations would produce oil for the British Navy. Shell’s petroleum transportation investments later led it to engage in the other major functions of the oil industry. The Sun Oil Company, another Pennsylvania organization, grew much stronger at Spindletop. The Magnolia Oil Company, a Standard Oil affiliate, had its origins at Spindletop. It later became part of the Mobil Oil Company. The group of Texas oilmen that ultimately became the Humble Oil and Refining Company individually got their starts at Spindletop. After the Humble Oil and Refining Company merged with Standard Oil of New Jersey, the Humble organization later became the Texas branch of Exxon, a Standard Oil subsidiary. Impact of Event The discovery of oil at Spindletop had a number of important long-run consequences. It proved that there were vast reservoirs of petroleum reserves west of the Mississippi River and that petroleum was not limited to the eastern half of the United States. The discovery of oil at Spindletop spurred other research and discoveries in the Texas and Louisiana salt dome fields, establishing the area as an oil region of permanent importance. This new research in turn propelled further oil-seeking activities and development of oil fields in northern and western Texas, making Texas the leading petroleum state in the union for much of the twentieth century. By 1929, Texas was the leading producer of petroleum in the United States, producing 35 to 45 percent of the national total, and it became one of the leading oil-producing areas in the world. Texas held the position of the top-producing state in the union until the 1970’s, when Alaska and Texas each produced approximately 30 percent of the national total. The progress of the oil industry in Texas led to rapid growth of highly lucrative associated industries. In their very first oil strike at Spindletop, Lucas and his team used new techniques such as rotary drilling, drilling mud, and airlift of oil that afterward became standard operating procedure for oil producers. All these methods created a demand for an industry to produce drill bits and other tools and supplies. The most prominent of the companies supplying this equipment was the Hughes Tool Company, the source of the initial fortune of Howard Hughes. The growth of petroleum transportation pipelines created a demand for firms to service and supply them. These organizations, growing in a symbiotic relationship with the 10

Discovery of Oil at Spindletop Transforms the Oil Industry

large oil corporations and many other smaller independent oil-producing organizations, were all crucial to the rapid growth of Texas beginning especially in the 1920’s and continuing into the 1950’s and 1960’s. Urban areas such as Houston and the Spindletop-Beaumont-Port Arthur-Orange complex, with ports giving access to the Gulf of Mexico, became the sites of many large refining and petrochemical plants. Because of its location on the Trinity River and its proximity to the highly productive fields of northern Texas, the Dallas-Fort Worth area grew dramatically beginning in the middle of the twentieth century. The Spindletop discovery opened up economic opportunity in an industry that had been monopolized by John D. Rockefeller’s Standard Oil Company. The Texas Company, Gulf Oil Company, and Shell Oil Company were born at Spindletop, and the Sun Oil Company grew stronger at Spindletop. All of these would later provide competition to Standard Oil. Although all these growing oil companies remained independent of Standard Oil, practically all had ties to that company, whether selling crude oil to be refined or refined oil to be marketed and sold to the general public. The growth of these corporations would, however, transform the oil industry from one characterized by monopoly (Standard Oil) to one that was more oligopolistic in nature. The dramatic discovery at Spindletop, by proving that there were major untapped areas of petroleum in the United States, opened the door for other opportunistic, risk-taking entrepreneurs and organizations. This led to the formation of the aforementioned major corporations as well as many smaller independents that helped boost the economy of Texas and the Gulf Coast region. Bibliography Clark, James A., and Michel T. Halbouty. Spindletop. New York: Random House, 1952. Written in a popular style, without footnotes or documentation. Effectively captures the drama and impact of the birth of the Texas oil industry at Spindletop. Good for those seeking an introduction to the Spindletop discovery and the early Texas oil industry. Goodwyn, Lawrence. Texas Oil, American Dreams: A Study of the Texas Independent Producers and Royalty Owners Association. Austin, Tex.: Center for American History, 1996. King, John O. Joseph Stephen Cullinan: A Study of Leadership in the Texas Petroleum Industry, 1897-1937. Nashville, Tenn.: Vanderbilt University Press, 1970. Gives an excellent account of Cullinan’s life, his establishment of the Texas Company, and the early Texas oil industry in general. 11

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Larson, Henrietta M., and Kenneth Wiggins Porter. History of Humble Oil and Refining Company: A Study in Industrial Growth. New York: Harper, 1959. A thorough, encyclopedic study of a small Texas company whose founders started at Spindletop and later merged with Standard Oil of New Jersey. Excellent in its analysis of intraindustry relationships. Melosi, Martin V. “Oil Strike! The Birth of the Petroleum Industry.” In Coping with Abundance: Energy and Environment in Industrial America. Philadelphia, Pa.: Temple University Press, 1985. Concisely details the events and impact of Spindletop as well as the early oil industry in Pennsylvania and California. The book as a whole is an excellent study of industrial-governmental relationships in the twentieth century United States. Pratt, Joseph A. The Growth of a Refining Region. Greenwich, Conn.: JAI Press, 1980. A good comprehensive study of the growth of the oil organizations in the Texas-Louisiana Gulf Coast region. _____. “The Petroleum Industry in Transition: Antitrust and the Decline of Monopoly Control in Oil.” Journal of Economic History 40 (December, 1980): 815-837. A very good, concise analysis of the growth of the oil firms at Spindletop that challenged Standard Oil’s control of the oil industry. Bruce Andre Beaubouef Cross-References The Supreme Court Decides to Break Up Standard Oil (1911); The Teapot Dome Scandal Prompts Reforms in the Oil Industry (1924); Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska (1967); Arab Oil Producers Curtail Oil Shipments to Industrial States (1973); The United States Plans to Cut Dependence on Foreign Oil (1974); The Alaskan Oil Pipeline Opens (1977).

12

CHAMPION V. AMES UPHOLDS FEDERAL POWERS TO REGULATE COMMERCE CHAMPI ON V. AMES Upholds Federal Pow ers to Regulate Commerce

Category of event: Retailing Time: 1903 Locale: Washington, D.C. The U.S. Supreme Court, through its broad interpretation of the commerce clause in Champion v. Ames, sustained federal powers to prohibit and regulate commerce Principal personages: Melville W. Fuller (1833-1910), the Chief Justice of the United States, 1888-1910 John Marshall Harlan (1833-1911), an associate justice of the U.S. Supreme Court, 1877-1911 John Marshall (1755-1835), the Chief Justice of the United States, 1801-1835 Albert J. Beveridge (1862-1927), a U.S. senator, 1899-1911, influential in passage of the Meat Inspection Amendment Summary of Event In 1903, the U.S. Supreme Court upheld the federal government’s potential to prohibit or restrict commerce. The case of Champion v. Ames, also known as the Lottery Case, altered the delineation between interstate and intrastate commerce under article I, section 8, clause 3 of the U.S. Constitution, the so-called “commerce clause.” The circumstances brought before the Court originated in 1895 with an 13

Landmarks in Modern American Business

act of Congress. This act made it illegal to transport or conspire to transport lottery tickets from state to state. On February 1, 1899, C. F. Champion sent two Pan-American Lottery Company lottery tickets from Dallas, Texas, to Fresno, California. The tickets were transported by a vehicle owned by the Wells-Fargo Express Company. Champion was arrested in Chicago under a warrant based on his alleged violation of the act. In 1903, the case was appealed to the U.S. Supreme Court for final review. The Court rendered its opinion in a five-to-four decision to uphold the conviction. Justice John Marshall Harlan delivered the majority opinion of the Court, while Chief Justice Melville W. Fuller gave the dissenting opinion. When the Lottery Case appeared before the Court, the power to regulate interstate commerce was a concurrent power shared by the states and the federal government. Prior to the Lottery Case, several decisions had begun the process of liberalizing the connotation of “interstate,” favoring federal control. One such case is Gibbons v. Ogden (1824). This decision played a major role in the Court’s final disposition of the Lottery Case by initiating a method for analyzing commerce issues. A review of the facts in Gibbons shows that the state of New York granted a monopoly to Robert Livingston and Robert Fulton in the operation of steamboats in the waterways of New York. Aaron Ogden managed, under the monopoly, two licensed steamboats ferrying between New York and New Jersey. Thomas Gibbons obtained a coasting license under a 1793 act of Congress and began competing with Ogden. Gibbons’ steamboat was not licensed to operate under the New York monopoly. The pressure of additional competition encouraged Ogden to bring action in a New York Court to prohibit Gibbons from operating. Writing for the majority, Chief Justice John Marshall delivered the opinion of the Supreme Court, which held the New York monopoly law to be unconstitutional. In Gibbons, the Court aspired to denote interstate commerce. Gibbons’ attorneys argued that it is traffic, to buy and sell, or the interchange of commodities. The Court agreed that interstate commerce includes traffic but added the notion of intercourse. Generally, intercourse portrays exchange between persons or groups. With this notion, the Court reasoned that interstate commerce does not end at external boundary lines between states but may be introduced into the interior. They determined that commerce may pass the jurisdictional line of New York and act upon the waters to which the monopoly law applied, thus concluding that the transportation of passengers between New York and New Jersey constituted interstate commerce. In the Champion v. Ames decision, the Court went on to reference other 14

CHAMPION V. AMES Upholds Federal Powers to Regulate Commerce

decisions that sanction federal authority. These cases continued to expand the essence of interstate commerce. Consequently, the Court resolved that commerce embraces navigation, intercourse, communication, traffic, the transit of persons, and the transmission of messages by telegraph. In the Lottery Case, the use of a vehicle from Wells-Fargo Express traveling from state to state was relevant. The Court held that this travel provided sufficient intercourse with interstate commerce to allow federal domination. Further, the Court viewed the congressional justification for the creation of the act as being rational. It determined that the federal government is the proper means for protecting U.S. citizens from the widespread pestilence of lotteries. The Court deemed that such an evil act of appalling character, carried through interstate commerce, deserves federal intervention. Chief Justice Fuller’s dissenting opinion stated that the Court had imposed a burden on the state’s powers to regulate for the public health, good order, and prosperity of its citizens. To hold that Congress has general police power would be to defeat the operation of the Tenth Amendment. This argument would constitute the foundation of many later dissenting opinions. This particular conviction never became the majority view. At the time of the Lottery Case, there was an escalating struggle between a desire for a strong federal government, called federalism or nationalism, and the states’ right to regulate themselves. This conflict roots itself as far back in U.S. history as the Constitution itself. After the war for independence with England, the states regarded themselves as independent sovereigns. The Articles of Confederation allowed only minimal intrusion into states’ internal affairs by the Continental Congress. Faced with the inability of the confederation to function properly, provincial patriotism had to concede. The delegates at the Constitutional Convention, in an effort to fabricate a more concentrated federal government, made many compromises. They maintained within the Constitution, however, certain seemingly inescapable limits on the federal government. As a consequence, the judiciary generally discerns the Constitution as being a limitation on federal power. Without an expressed or implied grant of authority from within the Constitution, the federal government cannot regulate. This policy is not easily implemented in cases concerning commerce. Under the commerce clause, Congress has the authority to regulate commerce with foreign nations and among the several states and with Native Americans. The commerce clause seems to conflict with the Tenth Amendment. This amendment assigns all rights to the states, unless such control is prohibited or delegated to the U.S. government by the Constitution. The 15

Landmarks in Modern American Business

Tenth Amendment is said to contain the states’ police powers. Further, the Constitution does not expressly exclude states from regulating interstate commerce. It simply limits the federal government’s jurisdiction over interstate trade and precludes interference with purely local activities. To add another complication, consider the supremacy clause, article VI, paragraph 2. This states that if legitimate state and federal powers are in conflict, then the national interest will prevail. This power is enhanced by the Court’s broad interpretation of the “necessary and proper clause” (article I, section 8) in McCulloch v. Maryland (1819). This ruling gave Congress a discretionary choice of means for implementing implied powers. From a political perspective of the Court, it is notable that McCulloch and Gibbons were before the Court while John Marshall was chief justice. Marshall served under President John Adams as the secretary of state and was a devout federalist. During Marshall’s tenure as chief justice, the Court vested within its jurisdiction an unusual allotment of power. It assigned to itself final interpretation rights over the constitutionality of all federal and state laws brought before the Court. Impact of Event The ruling given in the Lottery Case had an immediate influence on society. Social reformers quickly seized upon the rationale provided by the Court and began prompting Congress to regulate. In 1906, Senator Albert J. Beveridge successfully proposed a meat inspection amendment to an appropriations bill. The amendment prohibited the interstate shipment of meats that had not been federally inspected. The amendment received an influential recommendation from President Theodore Roosevelt. Additionally, Upton Sinclair’s novel The Jungle (1906) greatly intensified popular support for Beveridge’s cause. Sinclair was an active socialist. His publication characterized the life of a worker in the Chicago stockyards and induced President Roosevelt to investigate the meatpacking industry. During the same term, Congress also approved the Pure Food and Drug Act. Later, Beveridge would propose another bill based on the commerce clause. This legislation attempted to exclude from commerce goods produced by child labor. Beveridge was certain that the Lottery Case settled the constitutionality of his proposal. Convincing his colleagues of this would prove to be arduous and unsuccessful. When Congress finally passed the Child Labor Act of 1916, the Court would declare it unconstitutional in Hammer v. Dagenhart (1918). It would take another decade before such a law would be held valid under constitutional scrutiny by the Court. Despite this setback, the precedent established in the Lottery Case was 16

CHAMPION V. AMES Upholds Federal Powers to Regulate Commerce

adequate to sustain a wide variety of laws. These statutes limit the movement of harmful goods. During the early twentieth century, the Court upheld the exclusion from interstate commerce of impure foods, white slaves, obscene literature, and articles designed for indecent and immoral use. With only some antithesis, the Court continued to reform the meaning of interstate commerce to enhance federal control. A greatly extended application of the clause can be found in Heart of Atlanta Motel v. United States (1964). This case implicated the constitutionality of Title II of the Civil Rights Act of 1964. The act strives to eliminate racial discrimination in hotels, motels, restaurants, and similar places. The owners of the Heart of Atlanta Motel disputed the constitutionality of the act. It was the motel’s policy to refuse lodging to people of color. It advertised in several surrounding states, and approximately 75 percent of its guests were from other states. The Court upheld the constitutionality of the act. The tests employed by the Court were whether the activity is commerce that concerns more than one state and whether the act showed a substantial relation to a national interest. The Court postulated that the operation of a motel might appear local in nature, but it did affect interstate commerce. The Court resolved that a motel accommodating interstate travelers is engaged in commerce that concerns more than one state. Again, as in the Lottery Case, the Court determined that the evil averted by the act was a legitimate national concern. The rationale offered by the Court in Heart of Atlanta Motel exhibits the accumulation of many years of precedents. The Court asserted that the same interest that led Congress to deal with segregation prompted it to control gambling, criminal enterprises, deceptive practices in the sale of products, fraudulent security transactions, improper branding of drugs, wages and hours, members of labor unions, crop control, discrimination against shippers, the protection of small business from injurious price cutting, and resale price maintenance at terminal restaurants. The Court affirmed that Congress, in many of these examples, was regulating against moral wrongs. It concluded that segregation is a valid moral issue that would support the enactment of the Civil Rights Act. The Court has applied various constitutional tests to interstate commerce throughout its history. Initially, the Court viewed interstate commerce as physical movement between states. Soon it began examining federal jurisdiction based on the direct versus indirect influences the law in question has on interstate commerce. By the middle of the twentieth century, the Court began examining if the purely local activity had an appreciable effect on interstate commerce. 17

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Another offspring of the commerce clause is the Interstate Commerce Commission (ICC). The ICC consists of experts who aspire to protect and represent the public in matters of transportation in interstate commerce. This agency has immense powers and is not without its opponents. The need to unite the country necessitated a strong centralized government, but debates persist over the effects ensuing from the expanding role of the federal bureaucracy. Some critics perceive the federal government as an inadequate regulator of business, particularly in the area of environmental protection. Other commentators reason that businesses have become dependent on, and continue to use the government as, a form of protection from competition. Still others sense that business enterprises cannot mature and flourish because of excessive government control. The judiciary appears to recognize one conspicuous restriction on the federal government’s authority. Regardless of how significant the legal arguments are, most courts hesitate to make decrees that will prohibit major industries from operating. In addition, certain potential negative economic effects, such as the loss of many jobs, particularly in the automotive, steel, and oil industries, act as subtle legal shields from overly zealous government intrusion. Bibliography Cox, Archibald. The Court and the Constitution. Boston: Houghton Mifflin, 1987. A well-organized approach to major Court decisions. The author was a former solicitor general and the first Watergate special prosecutor. He details how the Court has kept the Constitution an important instrument. Fellmeth, Robert C. The Interstate Commerce Omission. New York: Grossman, 1970. Presents an encompassing view of the problems haunting the Interstate Commerce Commission. The Center for Study of Responsive Law produced the report, and Ralph Nader wrote the introduction. Gunther, Gerald. Cases and Materials on Constitutional Law. 10th ed. Mineola, N.Y.: Foundation Press, 1980. A well-written textbook that discusses the immense area of constitutional law. The text has remarkable depth but has a tendency to ask more questions than it answers. It provides a superior foundation in beginning constitutional research. Hilsman, Roger. To Govern America. New York: Harper and Row, 1979. An admirable compilation of data describing all features of government, including many peripheral aspects, such as philosophy and the future of American democracy. Mason, Alpheus T., and Donald Grier Stephenson, Jr. American Constitutional Law: Introductory Essays and Selected Cases. 12th ed. Engle18

CHAMPION V. AMES Upholds Federal Powers to Regulate Commerce

wood Cliffs, N.J.: Prentice-Hall, 1998. A commendable review and analysis of constitutional law. The authors take this complex subject and present it in a discernible manner. Tindall, George B. America: A Narrative History. 5th ed. New York: Norton, 1999. A constricted narrative that shapes U.S. history into an eventful story. The account presents history in themes such as judicial nationalism. Brian J. Carroll Cross-References The U.S. Government Creates the Department of Commerce and Labor (1903); The Supreme Court Strikes Down a Maximum Hours Law (1905); The Supreme Court Rules Against Minimum Wage Laws (1923); Roosevelt Signs the Fair Labor Standards Act (1938); The Civil Rights Act Prohibits Discrimination in Employment (1964); The Supreme Court Orders the End of Discrimination in Hiring (1971).

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THE U.S. GOVERNMENT CREATES THE DEPARTMENT OF COMMERCE AND LABOR The U. S. Government Creates the Department of Commerce and Labor

Category of event: Government and business Time: February 14, 1903 Locale: Washington, D.C. With the establishment of the Department of Commerce and Labor in 1903, the federal government became actively involved in matters of business, labor, and the national economy Principal personages: Theodore Roosevelt (1858-1919), the president of the United States, 1901-1909 Carroll D. Wright (1840-1909), the labor commissioner before the cabinet position was created George B. Cortelyou (1862-1940), the first secretary of the Department of Commerce and Labor James R. Garfield (1865-1950), a member of the U.S. Civil Service Commission who became commissioner of the Bureau of Corporations Summary of Event The Department of Commerce and Labor Act of 1903 created the Department of Commerce and Labor, a cabinet department within the executive branch of the U.S. federal government. The department included the Bureau of Corporations and the Bureau of Labor. The staffs of these bureaus were to investigate and provide information on corporations, indus20

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trial working conditions, and labor-management disputes. The creation of this department and its attendant federal agencies presaged an increasingly activist federal government in the twentieth century, one that would investigate, publicize, and intervene in the dealings of industry, labor-management disputes, and other matters deemed to be of importance to the national economy. In June, 1884, Congress established a Bureau of Labor as part of the Department of the Interior. In 1888, Congress gave the bureau independent status as the Department of Labor, but its commissioner did not have a position with the president’s cabinet. The commissioner reported directly to the president. Theodore Roosevelt became president in 1901, when public opinion was increasingly concerned with the growing power that large corporations, monopolies, and trusts had in American economic, social, and political life. The anthracite coal miners’ strike of 1902 (in Pennsylvania, Illinois, and Ohio), which lasted six months and threatened the nation’s coal supply, exacerbated public and political concern over industrial labor-management relations and was itself a major spur to the creation of the Department of Commerce and Labor. Political pressure from the public and from other elected officials encouraged Roosevelt to try to arbitrate the coal miners’ dispute by inviting representatives from labor and management to the White House. Although the meeting did not resolve the crisis—the owners refused to accede to the union’s demands—it was significant in that the president had brought labor representatives to the negotiating table. Previous presidents had tended to take the side of business in labor-management disputes. Representatives from the railroads that owned the coal mines attended the meeting, as did Roosevelt’s commissioner of labor, Carroll D. Wright, and John H. Mitchell, president of the United Mine Workers (UMW). The crisis still unresolved, Roosevelt created an arbitration commission to investigate the strike. Although no official representatives of the UMW were part of this arbitration commission, as the operators refused such recognition, Labor Commissioner Wright as well as other unofficial labor representatives were part of the commission. With winter closing in, making coal supplies an increasing concern, pressure from public opinion, influential business leaders, and other elected officials encouraged the strikers to go back to work on October 23, 1902, while the commission arbitrated the dispute. The commission finally forced a resolution on March 22, 1903, giving the coal miners wage increases but no official recognition of their union from the operators. The incident convinced Roosevelt of the need for a permanent federal agency to prevent or help resolve, through 21

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arbitration, any such future national economic crises. He also was convinced of the need for an increased federal role in the economy. It was in this context that in early January, 1903, Roosevelt called for the creation of a Department of Commerce and Labor, to include a Bureau of Labor and a Bureau of Corporations. The functions of those agencies would be to investigate the operations and conduct of corporations and to provide information about business structure, operations, and working conditions. The bill creating the department also provided for six other bureaus within the department, dealing with matters of immigration, the census, navigation, fisheries, standards, and business statistics. Roosevelt adroitly used the opposition of business leaders to enlist the support of the public and Congress for the bill. He used a letter from an attorney representing John D. Rockefeller’s Standard Oil, written to Matthew Quay, a senator from Pennsylvania, protesting against such governmental interference. Roosevelt portrayed such opponents of the Department of Commerce and Labor bill as those very forces of economic and industrial injustice that public opinion was increasingly worried about. By winning public support to his side, Roosevelt obtained overwhelming congressional backing. The bill to create the new department was passed on February 14, 1903. Roosevelt named George B. Cortelyou, his private secretary, as the first secretary of the Department of Commerce and Labor. Roosevelt and Cortelyou did not view the Department of Commerce and Labor as an agency to attack business but as an empowerment of government to expand services to businesses, particularly in providing market information. Cortelyou advised the president on labor disputes as well as on antitrust prosecution. Cortelyou also advised Roosevelt on the issue of the union shop in the Government Printing Office. James R. Garfield, as commissioner of the Bureau of Corporations, used the agency to investigate many corporations. He shared Roosevelt’s view that federal government should regulate businesses, not randomly break them up. Garfield received some outside criticism that the bureau was too lenient in dealing with the “trusts,” particularly regarding an investigation of the United States Steel Corporation, which he and the president thought was a “good” trust. He initiated stringent investigations of the beef and oil industries. The investigation of Standard Oil led to an antitrust suit, and ultimately the Supreme Court ordered the dissolution of Standard Oil in 1911. Impact of Event The creation of the Department of Commerce and Labor set an important precedent for the growing role of the federal government in the national 22

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economy. It was a significant departure from the policies of the legislative and executive branches in the late nineteenth century, which said that public agencies should not intervene in the private business sphere. The increased federal role in the economy was at times antagonistic to corporations. Investigations by the Bureau of Corporations led to antitrust litigation and dissolution of the American Tobacco Company and Standard Oil. For the most part, however, the Department of Commerce (which split from the Department of Labor in 1913) has by design functioned to help business and commerce in the United States. By distributing commercial and business statistics as well as agricultural and population censuses, the Department of Commerce makes available information that can help an industry or business learn about the market in a region or across the nation. This type of comprehensive information can be very important, particularly to individuals starting businesses, but would probably be prohibitively expensive to collect privately. The department’s national standards for weights and measures facilitate interstate commerce by standardizing the basis for trade and ensuring honesty. The department also helps industry by protecting its assets through patent and trademark registration. The Department of Commerce also provides information useful to the maritime and aviation industries by publishing nautical and aeronautical charts. All these actions represented a desire by both politicians and businesspeople to stabilize industry while promoting economic growth. In 1913, President Woodrow Wilson signed a bill that created the Department of Labor, separating it from the Department of Commerce. The presidential campaign of 1912 had reflected the growing public concern with industrial-labor relations and the rights and powers of labor unions. Presidential candidates Roosevelt and Wilson had differences on the issues of labor and corporation regulation, but both advocated continuing government activism on these issues. Wilson came into the presidency in 1913 with a series of progressive commitments, with an added focus on the rights of labor chief among them. Wilson worked with Congress to establish a separate Department of Labor, creating a new cabinet position for a secretary of labor. President Wilson’s choice for this position, William B. Wilson, president of the UMW, reflected his concerns over the rights of labor organizations. William Wilson was the first labor union representative to be named to the cabinet. President Wilson wanted a representative from the ranks of labor to have the authority of a cabinet-level position in representing executive branch efforts to arbitrate labor-management disputes. Secretary of Labor Wilson strengthened the Labor Department’s Division of Mediation and Conciliation and played a significant role in President Wilson’s efforts to arbitrate the Ludlow, Colorado, coal mine strike of 1914. 23

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President Wilson also pushed through Congress the Keating-Owen Act, barring from interstate commerce goods produced with child labor; the Adamson Act, which gave railroad workers an eight-hour day; and the Workmen’s Compensation Act, providing workplace insurance to federal employees. The enforcement of these new laws became the responsibility of the Department of Labor. The functions of the Department of Labor grew dramatically through the twentieth century. In the interests of workers, the Labor Department enforces laws regarding labor-management relations, child labor, equal pay, minimum wages, overtime, public contracts, workmen’s compensation, health and safety in the workplace, and industrial accidents. The Department of Labor also aids businesses by providing market information. This includes collecting economic information; analyzing trends in prices, employment, and productivity; and analyzing costs and standards of living. The department also created a number of agencies designed to relieve unemployment, such as the Neighborhood Youth Corps, the Job Corps, and the Bureau of Apprenticeship and Training. In 1914, President Wilson and Congress created the Federal Trade Commission to replace the Bureau of Corporations as the federal government’s primary antitrust and corporate investigatory agency. The Federal Trade Commission was the agency established to enforce the Clayton Antitrust Act of 1914. That act also represented the continuing and growing concern over competition, economic opportunity, and antitrust that grew from the precedent of the creation of the Department of Commerce and Labor in 1903. Bibliography Babson, Steve. The Unfinished Struggle: Turning Points in American Labor, 1877-Present. Lanham, Md.: Rowman & Littlefield, 1999. Blum, John Morton. “Theodore Roosevelt and the Definition of Office.” In The Progressive Presidents: Theodore Roosevelt, Woodrow Wilson, Franklin D. Roosevelt, Lyndon B. Johnson. New York: W. W. Norton, 1980. Good for an introduction to the progressive politics and policies of Theodore Roosevelt and Woodrow Wilson; also good chapters on Franklin D. Roosevelt and Lyndon B. Johnson. Concise, yet detailed and analytical. Brands, H. W. T. R.: The Last Romantic. New York: Basic Books, 1997. Iconoclastic biography of Theodore Roosevelt. Gould, Lewis L. “Immediate and Vigorous Executive Action.” In The Presidency of Theodore Roosevelt. Lawrence: University Press of Kansas, 1991. Excellent history of the foreign and domestic policies of both 24

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of Roosevelt’s administrations. Also good for students beginning study of the Progressive Era. Kolko, Gabriel. The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916. New York: Free Press of Glencoe, 1963. Excellent for those seeking an in-depth and challenging analysis of business-government relationships in the Progressive Era. Kolko contends that new regulations were not a victory for the “people” over the “interests.” Leaders of industry desired regulation, which they would help formulate and influence, to avoid competition and stabilize their industries. Miller, Nathan. Theodore Roosevelt: A Life. New York: William Morrow, 1992. The treatment of the Northern Securities case is particularly concise and well done, characteristics that hold for the book as a whole. Good for those with some familiarity with Roosevelt and the Progressive Era. Pringle, Henry F. “Trimming Sail.” In Theodore Roosevelt: A Biography. New York: Harcourt, Brace, and Company, 1931. Perhaps the most in-depth biography of Roosevelt. Very detailed on the policies of his administration, especially on the establishment of the Department of Commerce and Labor. Bruce Andre Beaubouef Cross-References The Supreme Court Decides to Break Up Standard Oil (1911); Congress Passes the Clayton Antitrust Act (1914); The Wagner Act Promotes Union Organization (1935); The Social Security Act Provides Benefits for Workers (1935).

25

THE SUPREME COURT STRIKES DOWN A MAXIMUM HOURS LAW The Supreme Court Strikes Down a Maximum Hours Law

Category of event: Labor Time: April 17, 1905 Locale: Washington, D.C. By ruling that maximum hours laws were unconstitutional, the Supreme Court upheld the freedom of contract and severely limited the ability of states to enact reform legislation Principal personages: Rufus Wheeler Peckham (1838-1909), an associate justice of the Supreme Court, 1895-1909, who wrote the majority opinion in Lochner v. New York Oliver Wendell Holmes, Jr. (1841-1935), an associate justice of the Supreme Court, 1902-1932 John Marshall Harlan (1833-1911), an associate justice of the Supreme Court, 1877-1911 Herbert Spencer (1820-1903), an influential scientist and philosopher who championed the theory of social Darwinism Summary of Event On April 17, 1905, the Supreme Court ruled five to four in the case of Lochner v. New York that maximum hours laws were an unreasonable interference with the liberty of contract. The Court ruled that the power of the state to regulate did not outweigh the freedom of contract. The ruling struck down an 1895 New York statute that had limited the number of work hours for any employee in any bakery or confectionery establishment to no more than ten hours in a day or sixty hours in a week. New York’s labor law 26

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was an example of the aggressive interventionist and experimental policies that several states had begun pursuing around the turn of the century. The Court held that New York’s experiment had been a “meddlesome interference” and an undue infringement on the right of free contract and thus of the private rights of the employer. In a powerful and eloquent dissent, Associate Justice Oliver Wendell Holmes, Jr., held that the states had the authority to pursue their own social experiments and enact reform legislation. New York’s Bakeshop Act had been enacted in an effort to regulate and improve the often dreadful working and health conditions in the state’s cramped bakeshops, establishments that often employed only a handful of workers and were often located in the basements of tenement buildings. Passed as an act to regulate the manufacture of flour and meal food products, the Bakeshop Act established maximum hours and required that bakeries be drained and plumbed; that products be stored in dry and airy rooms; that walls and floors be plastered, tiled, or otherwise finished; and that inspections be carried out. The law was not the first attempt to set limits on hours worked. Among the earliest efforts to regulate hours of work was an executive order signed by Martin Van Buren in 1840 that limited the daily hours of labor in government Navy yards to ten. Most early efforts to set limits on hours of labor concerned the employment of women and children. Massachusetts and Connecticut each passed laws limiting the number of hours for children employed in manufacturing establishments as early as 1842. By the late

By striking down laws limiting the numbers of hours women could work, the Supreme Court made it more difficult for states to protect workers—particularly women—against sweatshop conditions such as these seamstresses had to endure. (Deborah Cooney Collection)

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nineteenth century, laws limiting hours for women, children, or both had been passed in New Hampshire, Maine, Pennsylvania, New Jersey, Rhode Island, Ohio, Illinois, Missouri, and Wisconsin. The arguments in support of limiting the hours of work included enhancing the efficiency or productivity of labor and improving public health. Proponents of maximum hours legislation argued that limits on the length of daily labor would lead to qualitative as well as quantitative improvements. Clearly, any bakeshop laborer who toiled long hours in cramped sweatshop conditions stood to gain some benefit, but proponents argued that there were also potential benefits for the consumers of baked goods. The principal arguments against such legislation were simply that it was an overextension of the police powers of the state and that it infringed on the right of freedom of contract. Moreover, theories of social Darwinism and laissez-faire economics insisted that such government intervention was an unjustified and inefficient disruption of the free market. Joseph Lochner owned and operated a small bread bakery in Utica, New York. After being twice found guilty of violating New York’s Bakeshop Act, he was fined $50. He appealed his conviction to the New York Supreme Court and the New York Court of Appeals, losing each time. His case ultimately made its way to the Supreme Court. Why this case emerged as the test case for a host of reform legislation is unclear; Lochner’s bakery was a small and relatively obscure establishment. An ongoing clash between Lochner and the Utica branch of the journeyman bakers’ union may have led to his fine and kept this case alive on appeal. The majority opinion in Lochner was written by Associate Justice Rufus Peckham. Peckham was known for his staunch support of laissez-faire policies and his contempt for government regulation, beliefs that would lead others to link Peckham with the writings of Herbert Spencer, one of the most outspoken and best-known champions of social Darwinism. In an 1897 ruling in Allgeyer v. Louisiana, Peckham had written the opinion that held a law unconstitutional for depriving a person of liberty of contract. Any contract suitable to the operation of a lawful business was thus afforded protection under the Fourteenth Amendment. The doctrine of liberty of contract, established in Allgeyer, was advanced in Lochner. In Lochner, Peckham held that there was no reasonable ground for interfering with the liberty of a person or the right of free contract by determining the hours of labor in this particular case. Although he acknowledged the power of states to protect the health and morals of citizens in specific situations, he questioned the need for protection of bakers. Laboring long hours in a bakery, though perhaps unpleasant and posing some health risks, was neither as arduous nor as unsafe as working at many other 28

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occupations. By restricting the freedom of contract, New York’s Bakeshop Act had violated the due process clause of the Fourteenth Amendment and as such was unconstitutional. Since the connection between bakeries and health remained shadowy, the states were not free to exercise police or regulatory powers under the guise of conserving morals, health, or safety. In a dissenting opinion, Associate Justice John Marshall Harlan held that New York’s Bakeshop Act was not in conflict with the Fourteenth Amendment and that the states had the “power to guard the health and safety of their citizens by such regulations as they in their wisdom deem best.” Justice Harlan held that it was clearly within the discretionary power of the states to enact laws regarding health conditions and that such statutes should be enforced unless they could be demonstrated to have plainly violated the “fundamental law of the Constitution.” In Harlan’s opinion, the use of the Fourteenth Amendment to invalidate New York’s statute would in effect cripple the abilities of the states to care for the well-being of their citizens. In a forceful and eloquent dissent, Associate Justice Oliver Wendell Holmes, Jr., held that the majority decision in Lochner was based upon an economic theory rather than law and that a “constitution is not intended to embody a particular economic theory.” In this well-known dissent, Justice Holmes criticized the majority extending the doctrine of liberty of contract and for defining too narrowly the states’ police power. Holmes went on to write that a constitution is written for people of fundamentally differing views and that the “Fourteenth Amendment does not enact Mr. Herbert Spencer’s Social Statistics.” Impact of Event The immediate impact of the Court’s decision in Lochner was to restrict, or at least postpone, the ability of states to regulate such economic issues as maximum hours and minimum wages. Exactly how the Supreme Court would define the regulatory role of the states was an issue of great interest to reform-minded legislatures as well as to employers and their employees. The use of legislative reform was becoming more common, but such legislation often faced hostile review by the generally conservative courts. Within a matter of a few years, the movement for shorter hours appeared to have won, lost, and then won again in significant cases before the Supreme Court. In 1898, the Court upheld a limitation on hours for Utah miners and smelters in Holden v. Hardy. In 1905, it reversed Joseph Lochner’s conviction as an illegal and unwarranted interference with the liberty of contract, but in 1908 it upheld an Oregon law limiting hours for women in factories and laundries in Muller v. Oregon. The Court’s majority apparently viewed Lochner differently from the 29

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other two cases because its members saw no good reason that bakers should be singled out; if bakers’ hours were regulated, then regulations on others would follow. Exceptions could be made for inherently dangerous occupations or in the case of women and children, but a general limitation on hours was not yet to be accepted. A 1917 ruling, in Bunting v. Oregon, accepted a ten-hour day for men and women on the grounds of preserving the health and safety of workers but only because the legislation did not apply to all workers, only those workers in certain inherently dangerous industries. The implications of the Court’s ruling in Lochner obviously extend far beyond Joseph Lochner and the treatment of bakers in Utica bakeshops. The Court’s decision signified an ardent acceptance by the Court majority of the doctrine of laissez-faire capitalism and a belief that reform legislation and the regulatory movement could be suspended by the courts. By ruling against the state of New York, the Court sent a clear message of hostility to any reform-minded legislative body. Liberty of contract, in this case the right of Joseph Lochner to make his own contracts and control his property, took precedence over the right of the state to exercise its police powers. Up until the economic crisis of the Great Depression, the mostly conservative justices of the Supreme Court used the doctrine of liberty of contract to limit the ability of states to enact reform legislation. Specific contracts could always be struck down, but only in those cases with narrowly defined public purposes. A notable example of prevailing judicial temperament can be seen in the 1908 case that outlawed “yellow dog contracts,” Adair v. United States. A law protecting union members by prohibiting yellow dog contracts, under which employees promised not to join a union, was judged by the Court to be an unreasonable invasion of personal liberty and property rights. This reliance upon liberty of contract and devotion to laissez-faire economic doctrines remained a marked feature of the Court for some years. Not all scholars agree that the Court was as hostile to regulatory legislation and as antilabor as a few of these decisions might imply. The decision in Lochner ranks among the most famous of all Supreme Court rulings, but for dubious reasons. Many consider it now, as Justice Holmes considered it then, an insensible ruling that ignored the hardships of sweatshop labor and launched a misguided assault on reform legislation. The premise of the decision later came into question. Rather than remove labor relations from the domain of politics, most people came to accept the notion that public debate and legislative action on economic issues is an appropriate use of police powers. Social change is often a difficult and lengthy process. The necessary adjustments of an emerging industrial and increasingly urban society, with its resulting conflicts in labor relations, raised perplexing issues. Progres30

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sive reformers, and later New Dealers, who sought change through legislative enactments found, as in Lochner, that the courts were often unsympathetic. The realities and the pressures of the Great Depression led to a pervasive revision of judicial, political, and economic philosophies. New and inventive attempts were made to revitalize the economy, and legislatures were generally given more freedom to exercise regulatory powers. Bibliography Hall, Kermit L., ed. The Oxford Companion to the Supreme Court of the United States. New York: Oxford University Press, 1992. Contains a detailed and useful outline of the history of the Court, major decisions and doctrines that have guided and influenced Court rulings dating back to 1789, and brief biographies of every justice who served on the Court and other historically significant characters. Concise but detailed entries help to make landmark cases and legal terms accessible to a variety of users. ______, ed. The Oxford Guide to United States Supreme Court Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Kens, Paul. Judicial Power and Reform Politics: The Anatomy of “Lochner v. New York”. Lawrence: University Press of Kansas, 1990. Presents a well-written and well-documented analysis of the issues surrounding the Lochner case, turn-of-the-century bakeries, the politics of reform legislation, and the ramifications of the Court’s decision. Nichols, Egbert Ray, and Joseph H. Baccus, eds. Selected Articles on Minimum Wages and Maximum Hours. New York: H. W. Wilson, 1936. Outlines and defines the debate over whether Congress has the power to fix minimum wages and maximum hours for workers. Reprints of editorials and comments offer a variety of legal, political, and economic interpretations. Siegan, Bernard H. Economic Liberties and the Constitution. Chicago: University of Chicago Press, 1980. An examination of changing judicial policy and the Court’s review of economic legislation. Offers an explanation of alternative views of substantive due process and the protection of economic liberties. Ziegler, Benjamin M., ed. The Supreme Court and American Economic Life. Evanston, Ill.: Row, Peterson, 1962. One of many books outlining the decisions in important Supreme Court cases. Despite being dated, this collection has the advantage of listing only cases with compelling economic themes. Timothy E. Sullivan 31

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Cross-References Champion v. Ames Upholds Federal Powers to Regulate Commerce (1903); The Supreme Court Rules Against Minimum Wage Laws (1923); Roosevelt Signs the Fair Labor Standards Act (1938).

32

CONGRESS PASSES THE PURE FOOD AND DRUG ACT Congress Passes the Pure Food and Drug Act

Category of event: Consumer affairs Time: June 30, 1906 Locale: Washington, D.C. The Pure Food and Drug Act of 1906 established the first federal standards for food and drug regulation, reflecting a commitment to consumer protection advocated by social reformers as well as some bureaucrats, businesspeople, and scientists Principal personages: Harvey W. Wiley (1844-1930), the chief chemist with the United States Department of Agriculture, author of the Pure Food and Drug Act of 1906 Theodore Roosevelt (1858-1919), the president of the United States, 1901-1909 Upton Sinclair (1878-1968), a socialist, journalist, and author of The Jungle (1906), an exposé of the Chicago meatpacking industry Summary of Event The passage of the Pure Food and Drug Act by Congress in 1906 marked the culmination of a long struggle by an assortment of groups to enact federal legislation controlling the quality of foods and drugs widely available to consumers. Although many local and state authorities had attempted to guard against the sale of contaminated, or even harmful, food and medicinal products for several years prior to 1906, a variety of critics had charged that those regulations were ineffectual at best. Particularly as a result of the rapid growth of rail systems that could transport products between regions and states, dangerous or adulterated products were becoming threats not only in local markets but also for consumers across the nation. 33

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Scientific and medical experts offered crucial support for the passage of the 1906 act. Advocacy for federal pure food and drug regulation by physicians’groups, notably the American Medical Association, came rather late in the process of securing passage in comparison with state and local efforts by physicians, research scientists, and even agriculture commissioners interested in scientific farming. Those scientific proponents had been quite active in some states and localities, such as Massachusetts and New York City, beginning in the decades immediately following the Civil War. The careful investigations and calm presentations of researchers such as E. F. Ladd, food commissioner of North Dakota, began to receive notice beyond that of fellow specialists in the early years of the twentieth century. Ladd’s findings were stated in such an accessible manner in a paper on food adulteration he read in St. Louis in 1904 that they were published in popular periodicals such as the Ladies’ Home Journal. They caused a sensation among middle-class readers. In Ladd’s testing of cider vinegars, for example, it had been impossible to detect apple juice, a supposed ingredient. Products labeled as “potted chicken” and “potted turkey” contained no chicken or turkey that he could isolate. Cocoa shell and other foreign matter accounted for 70 percent of the substances found in his samples from chocolate and cocoa mixtures. Congress had heard such allegations much earlier, for example when the Committee on Epidemic Diseases of the Forty-Sixth Congress published a report recommending the establishment of a commission to study contamination in food and drugs. Congressional committee members listened in 1880 to the precise testimony of such experts as George T. Angell of Boston, who already had argued successfully for stricter local regulations on the food trade. In 1899 and 1900, a Senate investigation focused on the manufacture of contaminated food. The most consistent advocate for federal food and drug regulation was Harvey W. Wiley, the chief chemist for the United States Department of Agriculture (USDA). Wiley had been working at the USDA since 1883, when he published his findings on the adulteration of cane and beet sugars, milk, and butter. Ironically, the purpose of Wiley’s research had not been to uncover massive adulteration in the food industry. He had been trying to develop better analytical methods for the Bureau of Chemistry. He continued to write about his investigations in a methodical series of USDA bulletins in the 1880’s and 1890’s. When he realized the impact of his research, however, he began to advocate delving more thoroughly into food and drug adulteration. Wiley rapidly became convinced of the necessity of federal government action and went so far as to sanction unorthodox methods of demonstrating the dangers of substances. The “poison squads” 34

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of the USDA, for example, were a dramatic device. Chemists used themselves as guinea pigs to test the human effects of potentially adulterated or toxic substances. In the early twentieth century, no consumer lobby at the national level existed that could press for a national law providing interstate regulation of food and drug manufacture, distribution, and advertisement. Definitive congressional action was blocked repeatedly in several ways: openly by legislators closely tied to food or drug interests, or more subtly on constitutional grounds that Upton Sinclair, the author of The Jungle, is one of federal regulation would be an the rare novelists who wrote a book that changed intrusion on states’ rights. Be- history. (Library of Congress) tween 1879 and 1906, at least 190 bills concerning food and drug regulation were considered and defeated. Wiley’s careful efforts gradually began to convince some members of Congress and the public that a federal agency could be effective in detection, yet until early 1906, federal pure food and drug legislation seemed stymied. The spark for passage of an act that had been introduced in December, 1905, came as a result of the publication of Upton Sinclair’s shocking exposé of life among meatpackers in Chicago. That book, The Jungle (1906), had been intended by Sinclair more as a socialist condemnation of America’s treatment of immigrant workers than as an indictment of a particular noxious industry. Sinclair later commented that he had aimed for the heart of the public but had hit readers in the stomach. Certain images left in the minds of readers of The Jungle were indelible. The makers of processed meats such as sausages found themselves years later still fighting Sinclair’s allegations that the brutal machinery inside packinghouses sliced off workers’ fingers, which then were ground into meats. However uncommon such incidents were, especially in contrast with more usual contaminations, such as the presence of rat droppings in processing rooms, they captured some American consumers’ distrust of the 35

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large-scale meatpackers. Other muckraking books of the era, such as Joseph Lincoln Steffens’ The Shame of the Cities (1904) and Jacob Riis’s How the Other Half Lives: Studies Among the Tenements of New York (1890), could be written off by members of the public as condemnations of conditions in specific urban areas, conditions that could be overlooked if one simply stayed away from the areas of blight. Food contamination as described in The Jungle clearly was a problem too far-reaching to avoid. Sinclair’s vivid descriptions of the conditions under which meat was processed raised alarm not only among the public in general but also among key players in Washington, notably President Theodore Roosevelt, who ordered his secretary of agriculture, James Wilson, to investigate the validity of Sinclair’s book. Roosevelt, spurred on by his personal outrage, played a key role in ensuring passage of the act and in preventing its being watered down in committee. The Pure Food and Drug Act, along with a meat inspection bill passed in tandem with it, outlawed the shipment, interstate or abroad, of food that was judged to be “unsound” or “unwholesome.” The legislation gave new vigor to the inspection powers already exercised by several federal authorities, especially the Department of Agriculture, along with the Departments of Commerce, Labor, and the Treasury. The new laws expanded inspections already required for exported meats to make similar inspections mandatory for foods destined for American tables. Products that passed inspection were to be marked with a USDA stamp; unsuitable foods were to be destroyed in the sight of an inspector. The laws provided for truth in labeling, prohibiting false or deceitful advertising of food and drug products, known at the time as “misbranding.” The penalties for violation of pure food and drug laws included fines starting at $200, up to one year of imprisonment, and seizure of contaminated goods. Impact of Event With its complex provisions regulating the manufacture, sale, and advertisement of a vast range of food products and popular medicines, the Pure Food and Drug Act promised difficulties in enforcement and engendered hostility from several quarters when it went into effect on January 1, 1907. Many manufacturers had opposed its passage and continued to resent its requirements. Even members of Congress openly grumbled that the measure was an unwarranted intrusion on the right of individual states to regulate the health and welfare of their own citizens. Theodore Roosevelt was one of many individuals and groups who celebrated the achievement of the passage of the Pure Food and Drug Act. The act was the product of a series of delicate compromises between 36

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Roosevelt, Department of Agriculture investigators, and key members of Congress. In ironing out differences between a Senate and a House version of the act, a congressional conference committee produced a bill with somewhat more teeth than either house’s version, although certain provisions for which its sponsors had fought doggedly were abandoned, such as the placing of the date of canning on canned meats. For Roosevelt, passage of the legislation was evidence of his skill at political maneuvering and an example of a personal commitment to good health, both his own and the public’s. In Roosevelt’s mind, efforts to clean up packinghouses and to ensure high-quality consumer goods meshed well with his goals to expand his role as chief executive and to enhance the role of the national government. Biographers of Roosevelt have noted that Roosevelt’s part in the passage of the Pure Food and Drug Act, along with his advocacy of the Hepburn Act (passed in June, 1906, boosting the power of the Interstate Commerce Commission to examine railroad operations), marked his determination to provide decisive leadership in the wake of his convincing 1904 presidential election victory. Although Roosevelt’s support of the Pure Food and Drug Act was important to its eventual passage as “progressive” legislation, and although he was accused by some conservative Republicans of moving too far toward the left, he resisted easy categorization as a liberal or a follower of fads. For example, he characteristically announced his distrust of scientists’warnings about saccharin as a food additive, declaring that he used saccharin daily with the approval of his own physician and obviously was in excellent health. In the aftermath of the passage of the Pure Food and Drug Act, the writers of editorials as well as lawmakers themselves sensed that several watersheds had been achieved in terms of the authority of the federal government, the regulation of big business, and the protection of the public’s health by Congress. Those achievements came at a political price. Roosevelt had created or intensified divisions within the Republican Party. Most criticism of those developments, however, remained beneath the surface for a few years. Roosevelt’s prestige as an international figure seemed to increase the confidence of the public and Congress that his leadership in domestic affairs was worthy of trust. The furor surrounding publication of The Jungle, as well as intense political scrutiny of food production, was felt by manufacturers of consumer goods. One estimate put the drop in meat sales in the wake of The Jungle at 50 percent. The controversy made food processors and drug makers aware of the need to assure the public as well as potential regulators of the quality of their output. A number of producers of foods and drugs 37

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actually supported the Pure Food and Drug Act, on the grounds that regulation of their industry would reassure the public and increase consumption, both domestically and on world markets. The Pure Food and Drug Act did not stem the tide of product injury lawsuits. It may have created more such suits by raising expectations by consumers that products would be produced carefully and that if they were not, a governmental entity would catch the mistake. In a legal sense, therefore, federal food and drug legislation helped dispel any lingering notion that it was solely the buyer’s responsibility to beware of dangerous food and drug products. The act of 1906 also reflected the ideas that the collective protection of consumers was an appropriate function of the federal government and that federal food and drug regulation could be a more effective and scientific approach than were individual caution, local circumspection, or industry self-policing. Bibliography Anderson, Oscar E. The Health of a Nation: Harvey W. Wiley and the Fight for Pure Food. Chicago: University of Chicago Press, 1958. Emphasizes the role of Wiley, the importance of scientific investigations, and the publication of those investigations in technical and specialists’ journals, especially in the 1880’s and 1890’s, in bringing about medical and expert calls for national food and drug regulation. Supplemented by James Harvey Young’s 1989 study of the passage of the 1906 act. Brands, H. W. T. R.: The Last Romantic. New York: Basic Books, 1997. Iconoclastic biography of Theodore Roosevelt. Burrow, James G. Organized Medicine in the Progressive Era. Baltimore: Johns Hopkins University Press, 1977. Stresses the medical community’s efforts at professionalization, its success with public relations strategies, its alliances with state authorities, and its links with progressive reformers who wished to apply scientific findings to address social problems. Goodwin, Lorine Swainston. The Pure Food, Drink, and Drug Crusaders, 1879-1914. Jefferson, N.C.: McFarland, 1999. Survey of the history of lobbyists and elected officials fighting for new legislation. Gould, Lewis. The Presidency of Theodore Roosevelt. Lawrence: University Press of Kansas, 1991. A balanced treatment of Roosevelt as a politician, showing his practical methods of operation in conjunction with Congress. Draws judiciously upon earlier biographies by William H. Harbaugh and John Morton Blum, and on Gould’s own examination of Roosevelt’s political style contained in earlier publications. Contains a detailed bibliographic essay. 38

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Wiebe, Robert. Businessmen and Reform. Cambridge, Mass.: Harvard University Press, 1962. Along with Wiebe’s The Search for Order (Westport, Conn.: Greenwood Press, 1980), provides an influential explanation of various reasons why businessmen supported or opposed progressive reforms, with emphasis on the desire by entrepreneurs to promote efficiency and predictability through governmental action. Utilizes in great detail the records of national business groups such as the National Civic Foundation as well as chamber of commerce publications. Young, James Harvey. Pure Food: Securing the Federal Pure Food and Drug Act of 1906. Princeton, N.J.: Princeton University Press, 1989. Examines passage of the act in detail, sorting out Roosevelt’s and Senator Albert Beveridge’s behind-the-scenes pressuring of the Senate against the lobbying of meatpacking interests. Illustrates the process of publicizing the findings of governmental and scientific investigators. Elisabeth A. Cawthon Cross-References Congress Sets Standards for Chemical Additives in Food (1958); Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965); The U.S. Government Bans Cigarette Ads on Broadcast Media (1970).

39

HARVARD UNIVERSITY FOUNDS A BUSINESS SCHOOL Harvard University Founds a Busine ss School

Category of event: Management Time: April 8, 1908 Locale: Cambridge, Massachusetts The Harvard Business School’s innovative instructional methods helped professionalize management and the way managers are educated Principal personages: Edwin F. Gay (1867-1946), the founding dean of the Harvard Business School Arch W. Shaw (1876-1962), a noted publisher and lecturer on business policy at Harvard Melvin T. Copeland (1884-1975), a distinguished professor of business administration and historian of the Harvard Business School Charles William Eliot (1834-1926), the president of Harvard University who suggested the establishment of a school of diplomacy and government A. Lawrence Lowell (1856-1943), a distinguished Boston lawyer and lecturer on government at Harvard, later its president Frank W. Taussig (1859-1940), a professor at Harvard who drafted a detailed plan for the Harvard Business School George F. Baker (1840-1931), a president of the First National Bank in New York and a major financial contributor to the Harvard Business School Summary of Event The emergence of the multiunit form, a vision that institutions of higher education could serve a utilitarian purpose, and a popular desire to profes40

Harvard University Founds a Business School

sionalize most occupations encouraged the development of collegiate business education in the late nineteenth century. An early participant in this exciting experiment in higher learning was the Harvard Business School, founded in 1908. Although preceded by the Wharton School at the University of Pennsylvania and the Amos Tuck School at Dartmouth, the Harvard Business School inaugurated a change in the education of professional managers through its innovative instructional methods and the high priority it placed on business research. An emphasis on framing business problems, class discussion, written case analysis, and a climate that encouraged confident decision making were seen from the outset as vital to the development of top managers. It soon became apparent, however, that a rather large breach existed between the school’s educational aspirations and its ability to achieve them. There were few teachers trained in business administration, and scholarship in the form of published works was almost nonexistent. In fact, course offerings, materials, and textbooks were sparse until the 1920’s. Early professors of business administration both at Harvard and elsewhere were drawn from a wide variety of academic disciplines. Economists such as Simon N. Patten were influential teachers and scholars at the Wharton School. The economics department also dominated academic life at the Amos Tuck School at Dartmouth. Business educators in this nascent stage of development were also drawn from less closely allied fields. Of the two accounting courses offered at Wharton, for example, one was taught by a professor of journalism who also instructed in business practices and banking. The other course was taught by a political scientist. The recruitment of faculty proved to be the most challenging aspect of running the fledgling Harvard Business School for its first dean, Edwin F. Gay. Determined that the education of professional managers required a unique approach, he eschewed teachers from undergraduate business programs and scholars from the traditional social science disciplines. This represented a departure from accepted practice. The business school, in fact, had been envisioned as a school of diplomacy and government by Harvard University president Charles William Eliot. Gay quickly set out to establish a core faculty and to recruit practicing managers from New York, Boston, and Philadelphia. William Morse Cole and Oliver Mitchell Sprague joined the regular faculty to teach accounting and banking, respectively. Paul Terry Cherington, who would make seminal contributions in the field of marketing education through his work Advertising as a Business Force: A Compilation of Experience Records (1913), joined the faculty from the Philadelphia Commercial Museum. Lincoln Frederick Schaub became the school’s first full-time instructor of commercial law. These individuals, 41

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along with two part-time instructors, eight part-time lecturers, and fifty-five outside (guest) lecturers, composed the school’s first teaching staff. Over the next decade, the permanent faculty grew, and as the case method became more widely used, the need for outside lecturers waned. Initial courses at Harvard were analogous to those provided at the older business schools. The required firstyear courses in accounting, commercial contracts, and economic resources of the Harvard University president Charles William United States (later marketing) were augmented by elecEliot. (Library of Congress) tives in industrial organization, corporate insurance, and banking. These traditional courses were seen as essential prerequisites for a career with a multiunit firm. Second-year courses examined the intricacies of management in specialized industries such as railroading, foreign trade, banking, and insurance. The school made a marked advance toward achieving its unique mission of educating professional managers through a “problems” or “case method” approach with the addition of Arch W. Shaw to its faculty. Shaw was the energetic publisher of System, a journal that crusaded for more efficient business practices. Upon his appointment to the faculty at Harvard, he turned his energies to developing a course in business policy using the case approach. His use of “real life” cases animated his classes, and in time his course became the capstone for the school. His book An Approach to Business Problems (1916), along with colleague Melvin T. Copeland’s Problems in Marketing (1920), did much to advance their respective specialties and advance business education in the United States. These textbooks, along with other seminal contributions to the business literature by Cherington, Charles Edward Russel, Bruce Wyman, and Walter Dill Scott, became required reading in every business school and program soon after publication. Despite these works, however, there was a dearth of business information and research material needed for the development of cases and advanced coursework. The development of the mar42

Harvard University Founds a Business School

keting discipline, perhaps more than any other in the business curriculum, was constrained as a result of meager “real life” data. Even the trade journals of the day gave scarce attention to selling or marketing problems. The collection of business information and data for course materials, cases, and textbooks proceeded in an ad hoc fashion through individual professors and in a more organized manner through bureaus of business research. J. E. Hagerty, an early marketing professor at Ohio State University, for example, was frustrated by the paucity of textual material in his discipline and attempted to fill this breach by interviewing local businesspeople. He discovered that these individuals gave freely of their time and information because of their curiosity about his research effort. They wondered why anyone would want to learn about their organizations, methods, procedures, and business problems. The Harvard Bureau of Business Research was begun at the urging of Arch W. Shaw shortly after the founding of the school. Although its principal mission was to gather data to aid instruction in the school, especially in marketing, it was hoped that research results would prove beneficial to students and teachers in other schools and to individuals in the wider business community. Its first study, of the shoe industry, received wide distribution in trade papers and other business publications and aroused interest in the activities of the school. Soon, studies of the operating expenses of grocers, department stores, and variety chains were produced. Later, scholarly investigations of labor unions, the distribution of textiles, cotton mill hedging practices, and interstate power transmission not only provided a wealth of teaching material but also encouraged further exploratory work in other business schools throughout the United States. Impact of Event The founding and the early success of the Harvard Business School had a significant effect on the professionalization of management, which in turn had consequences for the education of managers. The bold and innovative instructional methodologies and the scholarly climate at Harvard in the early twentieth century became a model for all other business schools to follow. It soon became common for business careers to begin after formal education in business administration. General education would precede professional coursework. Students would take a core of business subjects that gave coherence and content to their professional studies. This core included business law, statistics, marketing, accounting, money and banking, and corporate finance. The problem approach would supersede rote memorization of formulas and data. Written and oral communication were stressed for future business leaders. The discovery of new business knowl43

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edge through research and investigation of active organizations would be attempted and encouraged. Classroom instruction and theoretical knowledge would be augmented and tested with internship experiences in business. The formal education of managers would not necessarily terminate in the nascence of their careers, as professional education for practicing managers was introduced. Each of these innovations was a bold step. Each served to convince prospective students as well as academic and business leaders that the business site and academe could be connected through a business school or program. Within two decades of the opening of the business school at Harvard, numerous major public and private universities established similar ventures. Business schools were established at Ohio State (1916); Alabama, Minnesota, and North Carolina (1919); Virginia (1920); Indiana (1921); and Kansas and Michigan (1924). Columbia (1916) and Stanford (1925) were private institutions that established business schools during this period. In addition, it would not be long before an even larger number of public and private institutions established business programs “in town” to educate future business leaders living and working in large metropolitan areas. The revolutionary changes in the education of future managers were the result of a courageous decision to foster the development of an educational experience free of the intellectual control of other long-established academic disciplines. Gay believed that the aims of a graduate school of business should be instillation of a rational method of attacking business problems and development of intellectual respect for the management profession. This also entailed appreciation for the social, cultural, and ethical dimensions of the field. Harvard’s early commitment to developing a business administration paradigm that could stand on its own energized stakeholders to find new ways and means of educating a new profession, that of management. The case method, with its attendant vigorous analysis and discussion of companywide problems together with scholarly investigation of living organizations, was an important part of this philosophy of education. Case studies adopting the companywide problems approach benefited students, teachers, and practitioners alike. Students benefited by seeing that rational decision-making processes could be applied to problems encountered in a wide variety of business settings. Professors gained because cases gave flexibility as well as content and depth to their courses. Wellresearched and well-written cases provided a wealth of information about industry practices and technical matters in the process of teaching problemsolving skills. Perhaps most important, practicing managers benefited from 44

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their training in the case method. As business school graduates, they enjoyed a common basis for communication and a better understanding of mutual problems. In short, managers trained in this analytical method could relate better to their peers. Business research, like the case method, can trace its origins to the first years of the school. It reached its full instructional potential some years later. Harvard’s pioneering Bureau of Business Research had substantial pedagogical value to the academic community in the school and elsewhere while also providing strategic information to managers in industry. The work of the bureau helped make class discussions and teaching materials more interesting and relevant for the first students in the school and, in time, became the foundation for instruction conducted there. The style and method of research carried out in the early days of the business school also had important consequences for the conduct of business research in general. The bureau, with its strategy of focusing its efforts on a small area of business and studying it thoroughly to achieve notable results in a brief period, its refusal to be commercialized, and its aspiration to be at a level equal to Harvard’s other schools, became a model for other researchers and institutions to imitate. Bibliography Chandler, Alfred D. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: The Belknap Press of Harvard University Press, 1977. This seminal work by a distinguished historian of business examines the rise of modern business enterprise and its managers during the formative years of modern capitalism, from the 1850’s until the 1920’s. A superb book for anyone interested in the profession of management. Copeland, Melvin T. And Mark an Era: The Story of the Harvard Business School. Boston: Little, Brown, 1958. An important study of the founding and development of the Harvard Business School through its first half century. Written by a distinguished member of the school’s faculty during the period studied. An essential work for understanding the development of collegiate business education in the United States. Elderkin, Kenton W. Mutiny on the Harvard Bounty: The Harvard Business School and the Decline of the Nation. Mansfield, Ohio: Elderking Associates, 1996. Heaton, Herbert. A Scholar in Action: Edwin F. Gay. New York: Greenwood Press, 1968. A biography of the bold, imaginative, and scholarly first dean of the Harvard Business School. Provides interesting background information about this educational administrator whose early advocacy 45

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for the problem approach and business research aided the development of the profession of management. Pierson, Frank C., et al. The Education of American Businessmen. New York: McGraw-Hill, 1959. Chapter 3 provides in a concise manner excellent historical information about American business schools from their origins through the early 1950’s. Valuable as an overview while also providing interesting insights into the origin and growth—and often decline—of early American collegiate business schools. Veysey, Lawrence R. The Emergence of the American University. Chicago: University of Chicago Press, 1965. An authoritative study of the social and cultural forces that helped transform the American university into a modern institution at the beginning of the twentieth century. An important work for those interested in placing business education in a larger cultural and intellectual context. Can be enjoyed by both serious scholars and generalists. S. A. Marino Cross-References The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Roosevelt Signs the G.I. Bill (1944); Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965).

46

CONGRESS UPDATES COPYRIGHT LAW IN 1909 Congress Updates Copyrig ht Law in 1909

Category of event: Business practices Time: March 4, 1909 Locale: Washington, D.C. The Copyright Act of 1909 was the end product of hundreds of years of common and statutory copyright law Principal personages: William Murray Mansfield (1705-1793), a British jurist and member of the House of Lords who argued for copyright protection and monetary reward for authors Joseph Story (1779-1845), an American jurist whose decisions formed precedent for the fair use doctrine Oliver Wendell Holmes, Jr. (1841-1935), an American jurist whose opinions influenced future opinions on the nature of originality of works Learned Hand (1872-1961), an American jurist whose decisions shaped future definitions of copyright infringement Summary of Event Under copyright law in general, authors or creators of original works have the exclusive right to reproduce (or authorize others to reproduce) these works and are protected against unlawful copying, known as plagiarism or piracy. “Original” does not mean “unique.” Original works are those created by the author’s own intellectual or creative effort, as opposed to having been copied. Copying all or part of a work without permission of the author (or any agency the author has authorized for copying) constitutes copyright infringement. Willful unauthorized copying for the purpose of making a profit is a criminal offense punishable by fine or imprisonment. When authors suspect infringement but have no grounds for charging 47

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criminal intent, they can bring civil action against the alleged offender. Under certain circumstances, parts of authors’ works can be copied without permission according to what is known as the fair use doctrine. Works are protected by copyright for a specific length of time. At the end of that time, a work is said to be in the public domain and can be copied without permission. Ever since the concept of the right to copy was established and codified, copyright has existed under both common and statutory law. Common law is unwritten law, based on tradition and precedent. Statutory law is written law passed by a legislative body, such as the British Parliament or the United States Congress. In general, common law protects a work before it is published and statutory law protects it after it is published. In both common and statutory law, it is assumed that what is written or created is property. The creator of a work has sole ownership of the work and the right to dispose of it as one would any other type of property; that is, to sell it, lease it, transfer it, or leave it in a will. Upon publication of the work, the author gives up some of the ownership rights granted by common law but is given monetary rewards for doing so. The law is based on two sometimes conflicting principles: authors should be rewarded for their labors and knowledge should be made readily available to the pubic for the good of society as a whole. Much of the history of copyright law is concerned with attempts to reconcile these two principles. The concept and fundamental issues of copyright date back at least as far as the fifteenth century. With the invention of printing, copies of both ancient and contemporary works began to proliferate and become readily available to the public. Early English copyright law began One of the most distinguished American jurists never to sit on the Supreme Court, U.S. district to address the questions of court judge Learned Hand passed down decisions what should be printed, who that made a permanent imprint on U.S. copyright ultimately owned the works law. (Library of Congress) 48

Congress Updates Copyright Law in 1909

and for how long, how the owners should be compensated for them, and who should be authorized to copy them. Throughout Europe, by the sixteenth century printing had developed from an unregulated cottage industry of craftsmen to a full-fledged profession and a thriving large-scale industry. Usually, the printers of books were also the vendors of them. In England, the printing and selling of books was done by a monopoly called the Stationers’ Company. Copyright at this time was a license given to the Stationers’ Company by royal decree. The decree gave the company exclusive rights to print all works the government deemed proper to print. The law was for the benefit of publishers and booksellers more than for authors. Furthermore, since the license to publish was granted on the basis of what the government decided could or could not be published, it was actually a form of censorship. It bore little resemblance to the laws that followed but did recognize that what was written in a book was as much property as was the book itself. Authors, who had hitherto been supported by wealthy, interested patrons rather than by sale of their work, could now earn money (although hardly a living wage) apart from patronage by selling their manuscripts to printers, who paid them a lump sum. It was generally accepted that once the manuscript was sold, the work was no longer the property of the author. Copyright infringement, which frequently consisted of printing unauthorized works outside the Stationers’ monopoly, was more an offense against the publisher, or those who licensed the publisher, than against the author. By the late seventeenth century, the English press was generally liberated from the dictates of the authorities. There was much less censorship, and licenses to the Stationers’ Company were no longer renewed. Freedom of the press destroyed the Stationers’ monopoly, for now anyone could print virtually anything. An unfettered press also meant a lack of protection for authors from piracy and plagiarism. Literary piracy long had been considered an outrage, if not actually a criminal offense, and was supposed to be prevented by common law, but there were few means of enforcing common law. Both authors and booksellers pressured Parliament for legislation that would protect authors from piracy and provide booksellers with enough security to allow them to stay in business. In 1710, Parliament responded with the Statute of Anne, named for the reigning queen. The Statute of Anne established time limits, with renewals, on how long a published work would be protected before it went into the public domain and outlined penalties for copyright infringement. The law was not clear, however, on how long an unpublished work was protected by common law or whether common law was superseded by statutory law after a work was published. It did not answer whether an author gave up all rights to a work after it was published. 49

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There were many cases in which publishers freely copied works for which the statutory term of protection had expired. When the authors of the works complained that this free copying was a violation of their common law rights, the English courts decided that once a work had been published and the term of protection had expired, common law rights no longer applied. This conflict sparked long and heated debates over ownership and the balance between authors’ rights and the public good. These debates continued through the twentieth century. Limited and controversial as it was, the Statute of Anne became the pattern for all subsequent copyright legislation in both England and the United States. Twelve of the thirteen original states adopted copyright statutes before the federal Constitution was drawn up. These statutes were summarized in article 1, section 8 of the federal Constitution, which says: “Congress shall have power . . . to promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” The first federal copyright law, enacted in 1790, was revised in 1831 and 1879. On March 4, 1909, Congress passed a copyright law that remained in effect until revisions were made in 1976. The 1909 law states that the purpose of copyright is “not primarily for the benefit of the author, but primarily for the benefit of the public.” Although unpublished works were still held to be covered by common law, publication was necessary in order for a work to be covered by statutory law, and an author’s rights under statutory law were substantially different from what they were under common law. Under the 1909 law, there was no general protection of unpublished works. Omission of or serious error in a copyright notice or failure to deposit a copy in the Copyright Office resulted in loss or forfeit of copyright. The Copyright Office, located in the Library of Congress in Washington, D.C., was established by the 1909 law to keep records and register works. The law outlined procedures for registration of copyright, detailed circumstances of and penalties for infringement, and listed fourteen categories of works that could be copyrighted. It codified the standard of copyrightability of a work as being original by the author and not copied from other work. It also lengthened the duration of copyright to twenty-eight years, renewable for twenty-eight more. Impact of Event Just as the Statute of Anne had responded to the implications of the new technology of the printing press, so the law of 1909 tried to respond to the new technology of the early twentieth century. The 1909 law grew out of 50

Congress Updates Copyright Law in 1909

centuries of political upheaval, factional controversy, technological development, and legislative compromise. As English government swung from monarchy to republic and back to monarchy again, up to the early eighteenth century, written work was first strictly censored and then liberated to the point of anarchy. Printing had made works of all kinds widely available, and once the press was liberated in England, the rights of publishers, authors, and the public came into sharp conflict. Some of the conflicts were resolved by the Statute of Anne, which served as a pattern for American copyright law. In the spirit of the original state laws and the federal copyright law of 1790, the 1909 law stated its purpose as being “primarily for the public,” thus favoring the rights of the public over the rights of authors but allowing for reward to authors in order to encourage them to continue producing. In this way, the conflicting principles of rewards to creators and the “promotion of progress in science and useful arts” for the common good seemed to be reconciled. By extending the term of copyright coverage, it gave more protection to authors than previous legislation had. It provided no protection, however, for unpublished work, and it tended to supersede common law, since publication was a necessary condition for copyright. Nor did it address the special issues of copyright involved for writers as employees or contractors, such as newspaper reporters and freelance writers, who do what is known as “work for hire.” The fair use doctrine had been applied even in early copyright law and was based on the constitutional principle of public benefit from authors’ works. In 1961, while the 1909 law was still in effect, the Copyright Office listed what could be copied without permission and for what purpose. Research, instruction, and literary review, for example, were given fairly broad rights to copy. Fair use was not codified until the copyright law revision of 1976. As technology improved and became more varied, the 1909 law lagged in its provisions. In describing the classes of works that were copyrightable, the language of the 1909 law indicated that it was still largely based on the technology of the printing press. It protected the “writings” of an author, whereas later law protects “original works of authorship,” thus broadening the definition of “author” and lengthening the list of what can be considered to be authors’ works. Although the 1909 law listed motion pictures and sound recordings among the classes of copyrightable works, it made inadequate provision for the protection of what was disseminated via these new technologies and no provision at all for infringement issues arising from the use of photocopy machines, television, videotapes, computers, or cable and satellite communications. Beginning in 1955, there were several attempts to revise the law, but it 51

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was not extensively revised until 1976 (effective in 1978). The most significant impact of the 1909 copyright law on the writing and publishing world and on society in general, as beneficiary of authors’ work, is that it was specific, whereas prior legislation had been general. By establishing a Copyright Office, listing the kinds of works that could be copyrighted, and outlining how they could be protected, it sought to resolve the ongoing conflict between rewarding creators and benefiting their audiences. Bibliography Bunnin, Brad. The Writer’s Legal Companion. Reading, Mass.: Perseus Books, 1998. Practical handbook for authors. Bunnin, Brad, and Peter Beren. “What Is Copyright?” In The Writer’s Legal Companion. 3d ed. Reading, Mass.: Addison-Wesley, 1998. Contains practical and up-to-date legal advice for writers. Compares the constitutional foundation of copyright with current law and compares the 1909 and 1978 laws in outline form. Dible, Donald M., ed. What Everybody Should Know About Patents, Trademarks, and Copyrights. Fairfield, Calif.: Entrepreneur Press, 1978. Provides a lengthy historical background to copyright and practical guidelines to what copyright is and how it is obtained. Contains the full text of the 1978 law. Goldfarb, Ronald L., and Gail E. Ross. “What Every Writer Should Know About Copyright.” In The Writer’s Lawyer. New York: Times Books, 1989. Contains only brief historical background to copyright but provides important information on later developments in copyright law. Johnston, Donald F. Copyright Handbook. 2d ed. New York: R. R. Bowker, 1982. Describes and interprets every element of copyright law in detail. Includes the full texts of both the 1909 and the 1978 laws. Kaplan, Benjamin. An Unhurried View of Copyright. New York: Columbia University Press, 1967. Three lectures analyzing judicial decisions regarding copyright issues from the fifteenth century through the 1960’s. Moore, Waldo. “Ten Questions About the New Copyright Law.” In Law and the Writer, edited by Kirk Polking and Leonard S. Meranus. Cincinnati, Ohio: Writer’s Digest Books, 1978. Explains the 1976 revisions by comparing some of their elements to the 1909 law. Wincor, Richard, and Irving Mandell. “Historical Background—Copyright Law.” In Copyright, Patents, and Trademarks. Dobbs Ferry, N.Y.: Oceana Publications, 1980. Provides a concise, thorough, and extremely readable history of copyright from its origins to the status of the law in the 1970’s. Christina Ashton 52

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Cross-References Advertisers Adopt a Truth in Advertising Code (1913); The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Congress Limits the Use of Billboards (1965).

53

THE TRIANGLE SHIRTWAIST FACTORY FIRE PROMPTS LABOR REFORMS The Triangle Shirtwaist Factory Fire Prompts Labor Reforms

Category of event: Labor Time: March 25, 1911 Locale: New York, New York Public outrage following the Triangle Shirtwaist Factory fire led to immediate fire safety legislation and reform demonstrations, but substantial labor reform did not come until years later Principal personages: Rose Schneiderman (1882-1972), an influential member and later president of the Women’s Trade Union League Alfred E. Smith (1873-1944), a New York state legislator who conducted investigations and made recommendations for fire safety legislation Robert Wagner (1877-1953), a New York state senator who conducted investigations Max Blanck, a co-owner of the Triangle Shirtwaist Factory Issac Harris, a co-owner of the Triangle Shirtwaist Factory Summary of Event Prior to the Triangle Shirtwaist Factory fire of 1911, garment workers had begun to organize and make known their desires for reform. In 1900, the International Ladies Garment Workers Union (ILGWU) was formed. In 1903, the Women’s Trade Union League (WTUL) was established for the purpose of bringing more women into the trade unions. The Triangle 54

The Triangle Shirtwaist Factory Fire Prompts Labor Reforms

Shirtwaist Factory was the site of one of the first demonstrations, a 1909 event that grew into a general strike of garment workers known as the “Uprising of the 20,000.” The Triangle workers were locked out during that strike but were encouraged by the ILGWU and the WTUL to picket. Factory owners Max Blanck and Issac Harris hired replacement workers and called in thugs to break the pickets. Throughout the year-long series of strikes that followed, other factories agreed to various reforms. Although not meeting all demands, most shirtwaist makers agreed to shorter hours, collective bargaining, and safety improvements. The Triangle Shirtwaist Factory, however, retained its fifty-nine-hour workweek and refused to make safety improvements. Like many other plants of its kind during the first decades of the twentieth century, the Triangle Shirtwaist Factory was a loft factory, occupying the top three floors of an office building. Meeting the increased demand for tailored blouses for the growing number of female clerical workers during that era, Triangle was one of the most successful garment factories in New York City. It employed one thousand workers, mostly immigrant women who knew little or no English. They worked long hours in hazardous and unhealthful conditions for pennies a day. Workers were jammed elbow to elbow and back to back at rows of tables. Scraps of the highly flammable fabric they worked with were scattered on the floor or stored tightly in bins. Cutting machines were fueled by gasoline. The few safety regulations were ignored. Smoking was prohibited, but workers commonly smoked while supervisors looked the other way. Water barrels with buckets for extinguishing fires were not always full. There was one rotting fire hose, attached to a rusted valve. In general, conditions were ideal for fire to break out and spread at any time. Escape in case of fire was difficult or impossible. The only interior exit from the workroom was down a hall so narrow that people had to walk single file. There were four elevators, but usually only one was functional. The stairway was as narrow as the hall. Of the two doors leading from the building, one was permanently locked from the outside, and the other opened inward. On March 25, 1911, the day of the fire, the offices below the factory were closed for the weekend. About half of the Triangle workforce was in the factory on that Saturday. The flames spread far too quickly to be extinguished by the meager water supply in the barrels, and the fire hose did not work. In the stampede to get down the narrow passages and stairways to the doors, peopled were trampled. Some tried to break through the locked door. Other surged to the other door and were crushed as they tried to pull it inward. As people crowded into the elevators, others tried to ride down on 55

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the tops of the cars, hanging onto the cables. Soon there were so many bodies in the shafts that the one functioning elevator could no longer be used. The women, girls, and few men trapped in the workroom threw themselves out of the windows and were dashed to death on the pavement. Others tried to use the fire escape. Already too flimsy to hold much weight, the fire escape soon melted in the heat and twisted into wreckage. Only twenty women managed to escape by it. Firefighters arrived at the scene quickly but nevertheless too late. Once they arrived, several factors inhibited their efforts. Many of the women who jumped from the windows landed on the fire hoses. Their bodies had to be removed before the hoses could function. The nets and blankets that the firefighters spread to catch the jumping women tore, and the women crashed through to die on the pavement. The fire engine ladder reached no further than the seventh floor, one story short of the workroom. Those who escaped did so by being first out the door or down the elevator, or by climbing from the top floor onto the roofs of other buildings. The death toll was 146, including 13 men. Several of the bodies were so badly charred that they could not be identified, even as to sex. The cause of the fire was never discovered. Given the number of fire hazards that were present, it was speculated that the cause might have been a match, a lighted cigarette, or a spark from a cutting machine igniting gasoline or the combustible fabric scattered on the floor and packed in bins. On the evidence of the locked door, factory owners Blanck and Harris were indicted for first- and second-degree manslaughter. They claimed that they did not know the door was locked and were acquitted. Impact of Event The Triangle Shirtwaist Factory disaster was a terrible object lesson in the need for reforms in fire prevention in particular and labor reform in general. It also illustrated the need for solidarity among the organizations and labor groups working for reform. Public outrage at the 146 deaths and the miserable conditions under which the victims had worked formed the basis for future legislation on factory safety. The New York state legislature appointed investigative commissions to examine factories statewide, and thirty ordinances in New York City were enacted to enforce fire prevention measures. One of the earliest was the Sullivan-Hoey Fire Prevention Law of October, 1911, which streamlined six separate agencies into one fire commission with a fire prevention division that required the installation of sprinkler systems in factories. Significant labor reform for garment workers took longer to achieve. 56

The Triangle Shirtwaist Factory Fire Prompts Labor Reforms

Although they had gained only small victories compared to what they had demanded, the ILGWU and WTUL had demonstrated in the 1909 strike that workers could be organized and could be depended upon to fight with strength and determination. Immigrant women, who had to battle not only inhumane working conditions and language barriers but also a general hostility to their entering labor unions, had demonstrated a surprising show of force. The Triangle fire was a tragic example of how much more reform was still needed. At a memorial service held at New York’s Metropolitan Opera House, Rose Schneiderman, an influential member of the WTUL and later its president, gave a scathing speech pointing out how the Triangle tragedy indicated that alleged reform was not taking place. She called the crowd of workers, public officials, and interested citizens of all classes to join a working-class movement for reform. This speech, along with tens of thousands of New Yorkers marching in tribute to those killed in the Triangle fire, strenghtened the resolve of reformers, inspired the labor unions to get legislative support for their demands, and stimulated reforms of social ills directly related to poor labor practices. Those ills included lack of education, which was encouraged by the employment of child labor. State senator Robert Wagner and state legislator Alfred E. Smith began a series of investigations and recommendations to improve factory safety. Women connected with the unions and other reform organizations took to the streets to inform workers of the benefits to which they were entitled and encourage them to fight for those benefits when they were denied. Organizers conducted legislators on tours through factories, revealing the abuses that existed in them. Progress continued to be slow. It was not until 1913 that the investigations, recommendations, and resolutions resulted in effective labor legislation. In that year, the fifty-four-hour workweek became law. That same year, Max Blanck, who owned a new Triangle Shirtwaist Factory, was fined for keeping his doors locked and received a court injunction against using a counterfeit ILGWU fair-practice label he had been using to sell more shirtwaists. The Triangle fire acted as a catalyst to consolidate reforms in different sectors of society. Suffragists joined forces with the unions in their efforts to gain equal rights for women. Education reformers worked with the WTUL to teach immigrants English and to inform them about social issues and trade union practices. Women of the middle and upper classes held fund-raisers for the nearly empty coffers of the labor organizations. This sort of work was done nationwide, and its organizers had international counterparts. The ILGWU tightened its organization and gained the power to negoti57

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ate contracts better than those of other unions. It was particularly effective in negotiating the right to strike. During the years of World War I, a period of full employment and high production, the ILGWU managed to maintain union contract standards under the pressures of increased production demands. At the same time, the union began a new drive for a shorter workweek and established a thriving union health center, the first of its kind in the United States, to provide preventive medical service. Progress in labor reform continued to be slow and uneven, however, as it would be for decades to come. By 1915, management had increased efforts to reassert control over labor. This provoked a series of wildcat strikes, which provoked conflicts between conservative and more militant unions. Later, rank-and-file conflict with union leadership weakened union power further. On the other hand, the ILGWU continued to increase its power. By 1916, five years after the Triangle Shirtwaist Factory fire, the union had enough power both to withstand a lockout in New York City that affected twenty thousand workers and to win in a fourteen-week general strike by two thousand shops employing sixty thousand members. The immediate impact of the Triangle Shirtwaist Factory disaster on labor reform was that it provoked enough public outrage to establish stricter fire codes and inspire new and inexperienced labor organizations to press for supportive legislation. Response to the tragedy was part of the beginning of a long struggle for fair labor practices for all workers, equal treatment of women, and safe plants in which to work. Bibliography Babson, Steve. The Unfinished Struggle: Turning Points in American Labor, 1877-Present. Lanham, Md.: Rowman & Littlefield, 1999. Butler, Hal. “New York’s Triangle Tragedy.” In Inferno! Fourteen Fiery Tragedies of Our Time. Chicago: Henry Regnery, 1975. Citing eyewitness reports, the author describes the Triangle fire in vivid detail. The article is part of a collection on disastrous fires in the United States. Garrison, Webb. “Triangle Shirt Waist Fire.” In Disasters That Made History. Nashville, Tenn.: Abingdon Press, 1973. The author gives detailed reports on the significance of twenty-three disasters. The report on the Triangle fire includes specific details on the sociopolitical and economic conditions surrounding the fire and its aftermath as well as on the incident itself. Green, James R. “The Struggle for Control in the Progressive Era.” In The World of the Worker: Labor in Twentieth-Century America. New York: Hill & Wang, 1980. The author places the Triangle fire as a significant 58

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incident in the American labor movement as well as in the social and cultural history of the nation as a whole. Schneiderman, Rose. All for One. New York: Paul S. Eriksson, 1967. Written with editor Lucy Goldthwaite, this is the author’s own story of her fifty years in the labor movement. Chapter 10 details the Triangle fire and its aftermath. Wertheimer, Barbara Mayer. “Working Women in the National Women’s Trade Union League: 1903-1914” and “The Rise of the Woman Garment Worker: 1909-1910.” In We Were There: The Story of Working Women in America. New York: Pantheon Books, 1977. The volume is a narrative history of American working women from precolonial times to the mid-twentieth century. Contains valuable material on the significant developments in the labor movement and the influential women connected with it. Many illustrations, extensive notes, and an annotated bibliography. Christina Ashton Cross-References The Supreme Court Strikes Down a Maximum Hours Law (1905); The Supreme Court Rules Against Minimum Wage Laws (1923); Congress Restricts Immigration with 1924 Legislation (1924); Congress Passes the Equal Pay Act (1963); The Civil Rights Act Prohibits Discrimination in Employment (1964); Nixon Signs the Occupational Safety and Health Act (1970); The Immigration Reform and Control Act Is Signed into Law (1986).

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THE SUPREME COURT DECIDES TO BREAK UP STANDARD OIL The Supreme Court Decides to Break Up Standard Oil

Category of event: Monopolies and cartels Time: May 15, 1911 Locale: Washington, D.C. In its decision to break up the Standard Oil Company, the Supreme Court established the principle of the “rule of reason” in deciding whether companies were in violation of antitrust laws Principal personages: John D. Rockefeller (1839-1937), the president of Standard Oil Company, 1870-1911 John Sherman (1823-1900), a senator from Ohio, 1885-1897, author of the Sherman Antitrust Act of 1890 Edward White (1845-1921), the chief justice of the United States, 1910-1921 Summary of Event Founded in 1870, Standard Oil Company became one of the largest companies in the United States by the end of the nineteenth century. In Standard Oil v. United States (221 U.S. 1), decided on May 15, 1911, the Supreme Court found the company guilty of violating the Sherman Antitrust Act of 1890 based on alleged “unreasonable” restraints of trade, including buying out small independent oil companies and cutting prices in selected areas to force out rivals. The case resulted in the separating of the parent Standard Oil from its thirty-three affiliates. Eleven years after the historic oil discovery in Titusville, Pennsylvania, that marked the beginning of the modern oil refining industry, the Standard 60

The Supreme Court Decides to Break Up Standard Oil

Oil Company was incorporated by John D. Rockefeller in Cleveland, Ohio, on January 10, 1870. At the time of the company’s formation, the oil refining industry was decentralized. Standard Oil’s share of refined oil production in the United States was less than 4 percent, and Rockefeller had to compete with more than 250 other independent refineries. During the last quarter of the nineteenth century, deflation and oversupply of oil brought down oil prices, causing fierce competition among oil refineries. The price for refined oil fell from more than 30 cents a gallon in 1870 to 10 cents a gallon in 1874 and to 8 cents in 1885. Compared with other oil refineries, Standard Oil was managed efficiently under Rockefeller and his associates, allowing it to survive while many competitors failed. During the post-Civil War deflationary period, the railroad industry became very competitive. Rockefeller took advantage of Standard Oil’s increasing size to secure secret rebates from shipping companies, thus reducing transportation costs and overall operating costs. Rockefeller further reduced Standard Oil’s operating costs by vertically integrating the company, acquiring oil wells, railroads, pipelines, tank cars, and retail outlets. Vertical integration gave more control at all stages of production. Meanwhile, because of declining market conditions, many small and nonintegrated oil companies that were unable to reduce their operating costs became unprofitable to operate. In addition, the method of destructive distillation introduced in 1875 increased the minimum efficient size of a refinery to more than one thousand barrels per day, making smaller companies even less competitive. Rockefeller began to take advantage of the situation, buying out many of the independent refineries in Pittsburgh, Philadelphia, New York, and New Jersey at low prices, often below their original cost. Standard Oil soon refined about 25 percent of the U.S. industry output. In 1882, Rockefeller and his associates formed the Standard Oil trust in New York, the first major “trust” form of business combination in U.S. history. The company held “in trust” all assets of the many regional Standard Oil subsidiary companies, one of which was Standard Oil of New Jersey, the third largest U.S. refinery in the 1880’s. Despite the substantial drop in oil prices, Standard Oil was able to increase its profits by reducing costs from about 3 cents per gallon in 1870 to less than .5 cents in 1885. By 1900, the oil trust controlled more than 90 percent of the petroleum refining capacity in the United States. The size and power of Standard Oil led to public hostility against it and against monopolies in general, prompting passage of the Sherman Antitrust Act in 1890. During the same year, immediately after New York State’s action against the “sugar trust,” the state of Ohio brought a lawsuit against Standard Oil for illegal monopolization of the oil industry. On March 2, 61

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1892, the Ohio Supreme Court convicted Standard Oil of violating the Sherman Act by forming a holding company and forbade the company to operate Standard Oil of Ohio in that state. The court decision led to dissolution of the Standard Oil trust back into its independent parts. The New Jersey unit took advantage of favorable state laws to become the Standard Oil Company of New Jersey, now known as Jersey Standard, as the trust’s parent holding company. Rockefeller remained president, and management of the trust was consolidated through interlocking directorates of the more than thirty subsidiary companies. The supposedly separate companies thus were able to act as a single entity. In 1901, the discovery of the Spindletop oil field created a boom in oil production on the Gulf Coast of Texas. The formation of new oil companies, such as Texaco and Gulf, increased the competition faced by Standard Oil. Standard Oil responded by continuing to buy out independent oil refineries. The Standard Oil trust’s market share in the oil industry continued to expand. Meanwhile, the commissioner of the Bureau of Corporations, James R. Garfield, investigated the oil company for violations of antitrust law. As a result of his studies, the government, led by Attorney General George Wickersham, brought charges in November, 1906, in the Federal Circuit Court of the Eastern District of Missouri against Standard Oil for monopoly and restraint of trade in violation of the Sherman Antitrust Act. In 1909, the Missouri court found Jersey Standard guilty of violating section 1 of the Sherman Act by forming a holding company and of violating section 2 by restraining competition among merged firms by fixing transportation rates, supply costs, and output prices. Standard Oil appealed the decision to the U.S. Supreme Court. The Supreme Court upheld the Missouri decision on May 15, 1911, and later entered a dissolution decree to dismember the Standard Oil trust and divest the parent holding company, Jersey Standard, of its thirty-three major subsidiaries. Many of its offspring still bore the name Standard Oil. These new companies included the Standard Oil Company of Indiana (later American), the Standard Oil Company (Ohio), Standard Oil Company of California (later Chevron), Standard Oil of New Jersey (later Exxon), and Standard Oil of New York (later Mobil). The Standard Oil case marked the beginning of a new direction in U.S. antitrust legislation and prosecution. Along with the decision in the American Tobacco case in 1911, the ruling of the Supreme Court, led by Chief Justice Edward White, departed from earlier cases. The new interpretation of section 2 of the Sherman Act was that only “unreasonable,” instead of all, restraints of trade were illegal. The Standard Oil decision, followed 62

The Supreme Court Decides to Break Up Standard Oil

closely by the American Tobacco case, gave birth to a new doctrine in U.S. antitrust policy called the rule of reason. The allegedly “unreasonable” practices by Standard Oil that were ruled illegal under sections 1 and 2 of the Sherman Act included forcing smaller independent companies to be bought on unfavorable terms and selectively cutting prices in market areas where rivals operated, with the intent of bankrupting those rivals, while maintaining higher prices in other markets. Chief Justice White maintained that it was mainly Standard Oil’s merger practices in an attempt to monopolize the oil refining industry that constituted illegal restraint of trade. Impact of Event The Standard Oil case of 1911 significantly altered the course of American business history as well as the development of U.S. antitrust laws. The victory of the government against a powerful trust provided an important lesson in the early history of antitrust. The dissolution of Standard Oil into many independent companies effectively increased competition in the oil industry. In addition, the case provides a classic study of the development of American big business at the beginning of the twentieth century. The first major antitrust law was the Sherman Antitrust Act of 1890, which emerged largely from public dissatisfaction with the monopoly power gained by Standard Oil in the oil refining market. The Sherman Act prohibits conspiracies or combinations in restraint of trade (section 1), and any attempts to create them, known as monopolization (section 2). The limits of the law regarding what constitutes unlawful practices were not precisely defined, leading to different judicial interpretations of the act. In the decade following passage of the Sherman Act, only sixteen cases were brought to court. Even though the courts began to establish that actions such as formal agreements to fix prices or limit output were definitely illegal, court judges were equivocal in their treatments of the existing large trusts in industries such as oil (Standard Oil), tobacco (American Tobacco), and steel (United States Steel). The Supreme Court’s decision against Standard Oil marked the beginning of a new era in antitrust legislation and prosecution. It established the “rule of reason” approach, by which Chief Justice White maintained that it was not the history or the relative size of a monopoly such as Standard Oil in its market that was an offense against the law, but rather its “unreasonable” business practices. This new doctrine set a precedent for cases involving antitrust laws that was not broken until the Alcoa case in 1945. The Supreme Court decision in the Standard Oil case highlighted the need for additional legislation to define specific business practices that 63

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constituted “unreasonable,” and thus illegal, conduct. That need led to passage of the Clayton Antitrust Act and the Federal Trade Commission Act in 1914. The Clayton Act declared illegal specific “unfair” business practices including price discrimination, exclusive dealing and tying contracts, acquisitions of competing firms, and interlocking directorates. The Federal Trade Commission Act gave birth to a new government authority, the Federal Trade Commission, to enforce compliance of the modified antitrust law. The victory in the government’s prosecution of Standard Oil, together with passage of the Clayton Act, led to more vigorous enforcement of the antitrust laws. The U.S. Justice Department filed suit in the 1910’s and early 1920’s against many trusts in other industries, including American Can Company (tin cans), United Shoe Machinery Company (shoe machinery), International Harvester (farm machinery), and United States Steel Corporation (steel). The Supreme Court decision against Standard Oil also signified the government’s attitude toward mergers. Mergers and acquisitions subsided briefly, until the government’s failure in prosecuting the merger practices of the United States Steel Corporation in 1920. The dissolution of the oil monopoly, Standard Oil, effectively changed the structure of the oil industry. On one hand, its successor companies, particularly the New Jersey unit, maintained considerable market power in their regional territories. The retail price of gasoline increased sharply in 1915, leading to government investigation of the extent of competition in the oil industry. On the other hand, the government apparently succeeded in enforcing competition among the separated units. As a result of the dissolution, Standard Oil’s successor companies were allowed to operate only in the oil refining business. They began to confront competition from other companies, such as Shell, Gulf, and Sun, which operated with the advantage of vertical integration. In an attempt to battle the rising competition, two of Standard Oil’s successor companies, Standard Oil of New York and the Vacuum Oil Company, proposed a merger in 1930. The government filed suit in federal district court against their merger, as violating the 1911 decree. The court’s decision in favor of the merger began a new era of merger movement in the oil industry. Through mergers, the original thirty-four successor companies combined into nineteen companies during the 1930’s. In the 1920’s, Standard Oil’s successor companies began to expand their oil exploration overseas, particularly in the Middle East and Europe. That exploration continued as American resources were exhausted. Increased imports of oil, notably from the Organization of Petroleum Exporting Countries (OPEC) after its formation in 1960, intensified competition in the 64

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U.S. oil market and reduced American companies’ market shares. The oil refining industry developed into one with companies operating worldwide, many of them large relative to the industry as a whole but none with the power formerly held by Standard Oil. Bibliography Adams, Walter, ed. The Structure of American Industry. 7th ed. New York: Macmillan, 1986. Chapter 2 provides good coverage of the background and historical development of the petroleum industry as well as discussions of the industry’s structure, price behavior, and performance. Valuable for undergraduate and graduate students in industrial organization. Armentano, Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. New York: John Wiley & Sons, 1982. Covers major antitrust lawsuits since the Sherman Act and the development of antitrust legislation. Covers the Standard Oil case in chapter 4. Includes an appendix of relevant sections of antitrust laws. Written for undergraduate business and economics students. Bradley, Robert L. Oil, Gas, and Government: The U.S. Experience. Lanham, Md.: Rowman & Littlefield, 1996. Destler, Chester McArthur. Roger Sherman and the Independent Oil Men. Ithaca, N.Y.: Cornell University Press, 1967. A biographical study of the person who fought for small independent oil refineries against the monopolization of the industry by Standard Oil in the northeastern region. Easy to read. Gibb, George Sweet, and Evelyn H. Knowlton. The Resurgent Years, 1911-1927. Vol. 2 in History of Standard Oil Company (New Jersey), edited by Henrietta M. Larson. New York: Harper & Brothers, 1956. Deals with the evolutionary development of the New Jersey unit following the Standard Oil case in 1911, including operations overseas, increased competition with other Standard Oil successors, and labor relations. Hall, Kermit L., ed. The Oxford Guide to United States Supreme Court Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Hidy, Ralph W., and Muriel E. Hidy. Pioneering in Big Business, 18821911. Vol. 1 in History of Standard Oil Company (New Jersey), edited by Henrietta M. Larson. New York: Harper & Brothers, 1955. Comprehensive documentation of the company’s early history, particularly its administration and vertically integrated operations in the oil business. Good discussion of the dynamic development of a big corporation from 65

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business administration and business history perspectives. Valuable for business students. McGee, John. “Predatory Price Cutting: The Standard Oil (N.J.) Case.” Journal of Law and Economics 1 (October, 1958): 137-169. McGee’s controversial article provides arguments and evidence against accusations of predatory pricing practices by Standard Oil. His critique led to debates about the profitability of predatory price cutting and its violation of antitrust law. Whitney, Simon N. Antitrust Policies: American Experience in Twenty Industries. 2 vols. New York: Twentieth Century Fund, 1958. Chapter 3 of volume 2 provides a case study of the petroleum industry until 1950. Good economic analysis of the impacts of the antitrust suit on development of the industry. Other chapters are case studies of other major industries. The appendix contains critiques of the studies of economists and government officials. Jim Lee Cross-References Discovery of Oil at Spindletop Transforms the Oil Industry (1901); The Federal Trade Commission Is Organized (1914); Congress Passes the Clayton Antitrust Act (1914); The Teapot Dome Scandal Prompts Reforms in the Oil Industry (1924); The United States Plans to Cut Dependence on Foreign Oil (1974).

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ADVERTISERS ADOPT A TRUTH IN ADVERTISING CODE Advertisers Adopt a Truth in Advertising Code

Category of event: Advertising Time: August, 1913 Locale: Baltimore, Maryland The Associated Advertising Clubs of America adopted “A Business Creed” in the hope that other organizations would adhere to similar high standards Principal personages: Joseph Swagar Sherley (1871-1941), a congressman from Kentucky who introduced a measure to amend the Pure Food and Drug Act James Robert Mann (1856-1922), a congressman from Illinois who made significant contributions to modifying Sherley’s amendment Joseph Hampton Moore (1864-1950), a congressman active in development of the Sherley Amendment Summary of Event Adoption of a truth in advertising code by the Associated Advertising Clubs of America in 1913 was prompted by passage of the Sherley Amendment to the Pure Food and Drug Act of 1906. To better understand the significance of that 1912 amendment, it is necessary to review how the original act came into being. The purpose of the original act was to prevent the manufacture, sale, or transportation of adulterated, misbranded, or deleterious foods, drugs, medicines, and liquors. The act also intended to regulate traffic in foods, drugs, and medicine. In section 8 of the 1906 Pure Food and Drug Act, the term “misbranded” applied to all drugs, articles of food, or individual contents as well as 67

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packages or labels that bore any statement, design, or device regarding the ingredients or contents. The term “misbranded” also referred to any imitation or substitution. An item would be identified as “misbranded” if its label failed to state the quantity or proportion of any alcohol, morphine, opium, cocaine, heroin, alpha or beta eucaine, chloroform, cannabis indica, chloral hydrate, or acetanilide, or any derivative or preparation of such substances. In addition, if a package did not list the proper Public distrust in exaggerated advertising claims such as these for an alleged pain killer contributed to the decision of commer- weight and measure of the contents, it cial advertisers to adopt a code. (Library of Congress) was considered to be misbranded. A package could not be false or misleading in any way. Section 8 of this act further stated that ingredients could not be imitations or substitutes for the stated contents. Debate over House Resolution 11877 to amend the 1906 Pure Food and Drug Act took place on August 19, 1912. Congressman Joseph Hampton Moore of Pennsylvania suggested that one more addition be made to Congressman Joseph Swagar Sherley’s amendment regarding statements of contents in packages. He noted that in cases of nostrums and patent medicines, the statement in regard to the ingredients or therapeutic properties usually appeared on the inside of the cover of the package or bottle. Congressman James Robert Mann from Illinois stated that the effect of 68

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Sherley’s proposed amendment was not to keep drugs off the market but to keep sellers from making false claims about the curative powers of those drugs. The Sherley Amendment to section 8 of the Pure Food and Drug Act was approved on August 23, 1912. The amendment contained a clause stating that no package should make false or fraudulent claims pertaining to curative or therapeutic effects. A further amendment was approved on March 3, 1913, to state that reasonable variations would be allowed in regard to weight, measure, and numerical count. In August, 1913, “A Business Creed” was published by the Associated Advertising Clubs of America (AACA). The creed stated belief in the continued and persistent education of the press and public in regard to fraudulent advertising. Members of the AACA further stated a belief that each and every member owed a duty to the association of enforcing the code of morals based on truth in advertising as well as truth and integrity in all functions pertaining to the creed. The AACA creed also endorsed the work of the National Vigilance Committee, a group similar to a commission of the Associated Advertising Clubs, in its belief in the continued education of the press and public in regard to fraudulent advertising. The AACA also encouraged every advertising interest to submit problems concerning questionable advertising and to uphold the code of morals based on truth in advertising. At the date of publication of this creed, few businesses or associations had formal codes of conduct of the same sort, but many people endeavored to make business more profitable while exerting pressure to keep business activity on a higher plane than it had been. The adoption of a truth in advertising creed following on the heels of the Sherley Amendment was timely in its intent to promote the credibility of the AACA. At the time, magazines and other advertising media contained much material of dubious truth. Business suffered from mistrust by the buying public. Buyers often were taken in by false claims, some of which carried the potential for harm, as claims of cures or other benefits were made. The public was tired of throwing money away on false hopes, and this attitude was bad for business, as the members of the AACA well knew. Impact of Event Recognition of advertising as a viable means of widespread communication came around the beginning of the nineteenth century. The Industrial Revolution gave rise to the need to promote the abundant manufactured goods then being produced. Advertising as a profession developed in response to this need. As the profession grew into an industry, advertising practitioners became concerned with maintenance of high business standards. Advertising professionals saw the need to join together to protect and 69

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promote their trade. Across the United States, local organizations were formed to uphold industry standards. The aims of these associations were primarily education and self-regulation. In 1911, the Advertising Federation of America formed a national vigilance committee and launched the truth in advertising movement, a forerunner to the Better Business Bureaus. The Advertising Association of the West entered the movement a year later. These groups worked in cooperation with each other over the years. In 1962, they held a joint convention to discuss a merger that became a reality in 1967. The new group was named the American Advertising Federation (AAF), headquartered in Washington, D.C. The AAF is dedicated to serving its members by promoting, protecting, and advancing advertising interests, including the freedom to truthfully advertise legal products. Its actions and goals rely heavily on the AACA creed as a basis. The goals of the AAF include professional development, public education to promote awareness and understanding of how advertising contributes to the economy and society, fostering high standards of ethical conduct including truth in advertising, encouraging use of the advertising process for the public good, and recognizing and honoring excellence in advertising. The AAF upholds the high standards of the industry, including truth in advertising. It also opposes bans or restrictions on truthful, nondeceptive advertisements for legal products and services. It therefore opposed bans and restrictions on advertisements for tobacco products and alcoholic beverages. Some consumer goods fall under the scrutiny of the Food and Drug Administration (FDA). Vitamin supplements and herbal remedies, for example, are types of products at which the Pure Food and Drug Act was aimed. Most of these products comply with truth in advertising to the extent that no claims are made on the labels, other than warnings. Some products, for example, warn that use can contribute to a rise in blood pressure. Labeling thus made no false claims and few claims of any sort. Information about benefits of the products must come from other sources. A more subtle example of questionable advertising lies in the visual portrayal or image of a product. The Marlboro Man, for example, portrayed to impressionable audiences the idea that smoking is an activity undertaken by tough, masculine men. Another example is the slogan for Pepsi, “Be young, be happy, drink Pepsi.” The slogan does not directly state that drinking Pepsi will make one young and happy, but the suggestion is there. A final example comes from the young models typically used in advertisements for wrinkle cream. Such models may use the product for prevention of wrinkles; the implication of the ads, however, is that use of the product 70

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will make anyone look as young as the models. The premise of truth in advertising does not cover such subtleties. Consumer advocates also criticize packaging claims that are truthful but leave out important facts. Some food packages, for example, contain claims of having fewer calories; the fact is that the calorie reduction comes from the simple fact that there is less food in the container. Grocery shoppers are well advised to be wary because, although there is definitely truth in advertising as far as listings of ingredients, those listings often contain chemicals that are unfamiliar to all but the most informed shoppers. The FDA has banned certain food colorings as harmful. Other ingredients, however, can cause reactions in some people but not in others. Common reactions include rashes, digestive upset, and even heart palpitations. Many people have discovered a sensitivity to monosodium glutamate (MSG), but many packaged foods as well as certain sausage preparations still contain MSG. Consumers therefore must know their own situations. Labels will identify ingredients, but full truth does not extend as far as providing a warning that “this product may induce digestive upset.” It is up to the consumer to know. Truth in advertising codes and laws have extended to other sectors. A law firm in California was found guilty of false advertising, and an exterminating company honored a government order to produce scientific evidence for health and safety claims. One vacuum cleaner manufacturer filed suit against another to stop a campaign promoting its new cleaning effectiveness rating, which may have been misleading. It is evident that federal agencies, consumers, and the advertising profession are keeping watch to ensure that truth in advertising comes as close as possible to becoming a reality. Bibliography “A Business Creed.” The World’s Work, August, 1913, 384. The Business Creed was adopted by the Associated Advertising Clubs of America in an effort to keep business and advertising on a higher plane than previously. This is the text of the creed. Goodwin, Lorine Swainston. The Pure Food, Drink, and Drug Crusaders, 1879-1914. Jefferson, N.C.: McFarland, 1999. Survey of the history of lobbyists and elected officials fighting for new legislation. Pridgen, Dee. Consumer Protection and the Law. New York: Clark Boardman, 1986-1990. A comprehensive account of the history of consumer protection laws. Covers relevant court decisions. Topics include seller misrepresentation and the doctrine of caveat emptor. Reid, Margaret G. Consumers and the Market. New York: F. S. Crofts, 1938. A summary of the problems then facing consumers in such areas 71

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as labeling, product quality, advertising, and price setting. Includes specific examples and historical references. Sullivan, Mark. “The Crusade for Pure Food.” In America Finding Herself. Vol. 2 in Our Times: The United States, 1900-1925. New York: Charles Scribner’s Sons, 1927-1935. An account of the personalities and controversies that led to the 1906 Pure Food and Drug Act. Sullivan consulted with many of the people involved in passage of the law. U.S. Department of Agriculture. Office of the General Counsel. Food and Drugs Act June 30, 1906, and Amendments of August 23, 1912 and March 3, 1913 with the Rules and Regulations for the Enforcement of the Act, Food Inspection Decisions, Selected Court Decisions, Digest of Decisions, Opinions of the Attorney General and Appendix. Washington, D.C.: Government Printing Office, 1914. A government report detailing the passage of the Pure Food and Drug Act and its amendments. Young, James Harvey. Pure Food: Securing the Federal Food and Drugs Act of 1906. Princeton, N.J.: Princeton University Press, 1989. An authority on the history of medical misconduct presents a study of the evolution of the Food and Drug Administration and development of the Pure Food and Drug Act. Corinne Elliott Cross-References The Federal Trade Commission Is Organized (1914); The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Health Consciousness Creates Huge New Markets (1970’s); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999).

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FORD IMPLEMENTS ASSEMBLY LINE PRODUCTION Ford Implements Assembly Line Production

Category of event: Manufacturing Time: October, 1913 Locale: Highland Park, Michigan The Ford Motor Company began use of mass-production techniques to reduce costs and prices, thereby becoming the industry leader in automobile sales for a decade Principal personages: Henry Ford (1863-1947), the owner of Ford Motor Company William S. Knudsen (1879-1948), the factory manager for Ford Motor Company and General Motors Charles E. Sorensen (1881-1965), the production manager for Ford Motor Company Clarence Avery (1893-1943), the time study expert for Ford Motor Company James Couzens (1872-1947), the business manager of Ford Motor Company Summary of Event Introduction of the sturdy, high-wheeled Model T Ford in 1908 was followed by immediate success. Six thousand of the cars were sold in its first year. In 1910, 32,000 were sold; in 1911, 70,000; and in 1912, 170,000. Henry Ford had made a pledge to reduce the price of the car as the success of his company was realized, and he reduced the 1908 price of $850 to $600 in 1912. This made the machine competitive with the low-cost Buicks, which were priced at $850 in 1908. 73

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In 1908, Ford’s business manager James Couzens performed a market study that indicated that a price of $600 would ensure a strong competitive situation for Ford’s new Model T. At the same time, his best estimate of the price that could be offered with the current production methods was $850. In order to make the new car profitable, Ford had to find ways to cut costs. Couzens enlisted the aid of Clarence Avery, a time study expert, and Charles Sorensen, the production manager at Ford, in making a study of the practices then in use, with the intention of converting to mass-production methods.

Assembly lines reduced automobile production costs by having workers at stationary positions perform the same tasks more quickly as the cars rolled by. (Library of Congress)

Avery made exhaustive time studies to determine the labor costs of the various subassembly steps as well as the final assembly. At the same time, Sorensen conducted mock-up tests, simulating final assembly of the Model N car, another in the Ford line, as the chassis was pushed along on skids past the points at which components were fed in. Several things were needed to realize mass production. First, parts and subassemblies had to be reliably supplied and interchangeable. In 1908, Cadillac had demonstrated that car parts could be made with such precision that three cars could be disassembled, have their parts mixed, and then be 74

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reassembled into working vehicles that made a successful five-hundred mile test run. Mass production had been long practiced in firearms manufacture and in clock manufacture, as well as for other small assembled goods. Although automobiles had many more individual parts, most were not as complex nor as highly stressed as those in firearms, and they were not as dependent upon precision as those in timepieces. Ford believed that through better control of his sources for parts, including bringing many subassemblies into his works, he could satisfy requirements for precision and timely delivery. As early as 1800, pulley blocks for the Royal Navy were produced and assembled with specialized machinery designed by Henry Maudslay. The work that specialized machinery could accomplish grew ever more complex. In 1881, cigarettes were made at the rate of 120,000 per day on a machine invented by James Bonsack. Diamond Match in 1881 had machines capable of making and packing matches automatically. In 1884, George Eastman invented a continuous-process system for coating photographic materials. By 1880, flour mills were built to move the grist from incoming bins to shipping containers in continuous-flow processes that required no human handling of the materials. In some cases, the grain processing became so inexpensive that breakfast cereals were invented to sell the surplus. The next steps in reducing the cost of automobile manufacturing was much more difficult. Although standardized parts were available and the specialized machines to produce them had been invented, there was a need for a machine to aid in final assembly. Buick had experimented with the assembly line approach to automobile chassis assembly, moving cars along rude wooden tracks by hand. This innovation increased the production of Buicks from forty-five to two hundred per day, but it was not integrated with subassembly manufacture, nor was there any mechanical assistance to transport materials. In the spring of 1913, William C. Klann, who was in charge of engine assembly, introduced moving belt assembly, first to assembly of the flywheel-mounted magneto, then to engine and transmission production. The moving belt system proved to be workable, but only in a one-dimensional system in which parts were fed to a single line that carried the assembled product to completion. A two-dimensional system would be needed to make mass assembly of an automobile possible; branches of subassembly lines would feed into a trunk line for the auto chassis. To make this possible, Ford had to ensure that the “tree” would not wither for lack of parts along one “limb.” He negotiated supply contracts with his subassembly suppliers based on a time-required basis. Those 75

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suppliers that he believed were unable to satisfy these requirements he purchased or replaced with subassembly shops of his own. By 1914, the company had bought more than fifteen thousand special-purpose machine tools to produce parts in Ford’s own shops. In this way, Ford gradually acquired subassembly manufacturing capability for parts of his cars, beginning in some cases with raw material supply. The first Ford automobile assembled on a moving line was built in October, 1913. The chassis was pulled along the line by a windlass and ropes. In January, 1914, the power was switched to an endless chain drive.

In 1936 Charlie Chaplin (right) satirized the dehumanizing effects of assembly lines in his film Modern Times. (Museum of Modern Art, Film Stills Archive)

On February 27, Ford integrated the system into a fully conveyorized assembly line, utilizing rails to guide and support the cars, which moved past workers at a convenient height at the rate of six feet per minute. This new line demonstrated another innovation, the desirability of which was obvious once it had been tried. Raising the assembly line to about the level of a worker’s waist eliminated the need for workers to bend or squat, greatly reducing worker fatigue. Each feeder line was located at a level enabling a worker to swing or slide a part into place. Nothing ever came to rest, and nothing was lifted or carried except by machinery. 76

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Impact of Event Introduction of the assembly line reduced the labor time required to build a Model T from twelve hours to one and one-half. As the cost of manufacture fell, so could the price. Although sales of the car were temporarily stifled as a result of a patent infringement suit filed by George Selden, who demanded royalties for use of his engine design, sales rose from the few thousands before 1910 to millions, and the price fell from $850 in 1908 to $290 in 1926. During this period, the profits of the company rose steadily. In 1909, the company earned slightly less than $2 million. By 1913, profits exceeded $11 million. As the effects of the moving assembly process were realized, profits rose more steeply. Ford began to encourage his workers to be part of the market for his cars. On January 4, 1914, he and Sorensen met with other executives to discuss a general wage increase. At the time, workers received a starting wage of $2 a day, and the average wage was $2.20 per day. Ford made an executive decision that wages would start at $5 a day, about double the industry average. This decision had the desired effects on morale, labor turnover, and quality of work. In addition, it made it possible for a worker to buy a Ford car in 1914 for four month’s wages, thus making a potent case for the Model T being “everyman’s car.” Other automobile manufacturers were shocked that Ford would take such a huge step without consulting them. In order to compete for the semiskilled labor available in the Detroit area, they had to make similar wage adjustments, but from weaker financial positions. Ford remained the industry’s wage leader. Ford’s progress in reducing costs followed a learning curve of surprising regularity considering the early date at which mass production was introduced. From 1909 through 1923, the curve of price versus cumulative units sold followed a smooth slope as production increased by a factor of more than a thousand. The fact that the curve continued smoothly through the later stages of development of the Model T shows that there was continual refinement of the mass-production process. Much of this resulted from Ford expanding his business to include the earliest stages of supply, such as mining of raw materials. These acquisitions ensured a reliable supply of materials to allow mass assembly to continue without interruption. It set the style for later development of mass-produced products such as home appliances. An important effect of mass assembly was the change in the type of labor needed. When automobiles were assembled at a single staging area, a limited number of workers could work simultaneously at each site. Each performed several tasks and brought multiple skills to the job, including the 77

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ability to correct or mend defects in the parts being assembled. As production levels rose, the necessity of accepting laborers of lesser skill levels made greater supervision necessary. Even the one-dimensional system in which a car was moved from station to station still required clusters of semiskilled workers performing multiple tasks. The two-dimensional system meant that tasks could be separated along the line. The division of labor was limited only by the number of workstations that would fit along a production line of practical length. As each worker had fewer tasks to perform and parts became more uniform, requiring no “fitting” tasks to mount them, necessary skill levels fell. Workers could be trained quickly to perform a limited number of tasks. With this came a concomitant drop in the technical skill of supervisors, until the task of the “gang boss” shrank to mere social and time-keeping functions, allowing supervisors to oversee larger groups. In 1913, 5 percent of Ford Motor Company’s labor was salaried (management); by 1921 this had fallen to 2 percent. The division of labor into simple tasks facilitated training, since new workers needed to be taught to perform only the single tasks for which they were needed. Retraining would be necessary as the mix of tasks changed, but this would then involve seasoned workers, making the training process simpler. A large economic effect of the new production methods was a decrease in the “residence time,” the time that an automobile was in the factory under construction. Before mass assembly methods were introduced, residence time was twenty-one days for the Ford Model T. This fell to four days as the gains in efficiency of the mass assembly system were realized. This meant that the firm had less money lying idle in the form of expensive, partially completed products. This freed the company’s capital for factory expansion and other improvements. The introduction of mass assembly methods forced a change in manufacturing culture in the auto industry. In the heyday of the Model T, many cars were “assembly cars,” built under the name of the factory owner from parts, and even major subassemblies such as bodies, purchased from firms not related to the assembler. There were hundreds of brand names. Outside the town where a company’s factory was located, an automobile owner was vulnerable unless he or she could repair the car or find a general mechanic to do so. Mass manufacture meant that precise and interchangeable Ford parts could be shipped anywhere. Repair often meant simple replacement. With the availability of cheap, repairable, rugged automobiles came popular travel away from cities, with their mass transit systems. With that came pressures for better roads that was so intense that the federal govern78

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ment was forced to take an active role in their construction and maintenance. To stimulate interest, a private organization, the Lincoln Highway Association, was formed to plan for and provide an all-weather road from coast to coast. In 1916, the Road Aid Act was passed by Congress to provide federal funds to assist the state in improving rural roads. This was followed in 1921 by a more comprehensive federal highway act. Bibliography Abernathy, William, Kim Clark, and Alan Kantrow. Industrial Renaissance. New York: Basic Books, 1983. A compact treatise on the rise of industry in the United States, using the automobile industry as an illustration. It studies the economics of the industry from its birth and projects economic progress based on continued technological improvements. Bruchey, Stuart. Enterprise: The Dynamic Economy of a Free People. Cambridge, Mass.: Harvard University Press, 1990. Bruchey presents a history of industrial enterprise from colonial times until the present, showing the effects on the American economy and culture of domestic and foreign influences. Contains much demographic and economic data in tabular form. Chandler, Alfred. The Visible Hand. Cambridge, Mass.: Belknap Press, 1977. A study of the changing role of management in the burgeoning American manufacturing industry. Contains a concise history of manufacturing methods and projections of future changes in various industries as a consequence of continued changes in technical and managerial methods. Crabb, Richard. Birth of a Giant. Philadelphia: Chilton, 1969. A history of the American automobile as it was affected by the talents and personalities of the men who created it. There are anecdotes, some possibly apocryphal, about the principals as well as illuminating vignettes showing their flaws and foibles. Of interest are many clear photos of early auto manufacturing and testing. Flink, James. The Car Culture. Cambridge, Mass.: MIT Press, 1975. Flink presents a complete history of the manufacture of the American automobile, including design, management, financing, and marketing. Of particular interest is a thorough treatment of the effects of large-scale auto manufacture and widespread ownership upon the American culture. Hayes, Robert. Restoring Our Competitive Edge. New York: Wiley, 1984. A comprehensive treatment of economic competition in manufacturing as it arises from production planning, improved processes, and technological innovation. Contains case studies of mass-production facilities and the effects of various hardware and managerial factors. 79

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Piore, Michael. The Second Industrial Divide. New York: Basic Books, 1984. A study of the rise of productivity in America resulting from technological innovation. Selected corporations are studied to illustrate various elements of industrial growth. Mass production is treated separately as affecting large-scale manufacture. Rae, John. The American Automobile. Chicago: University of Chicago Press, 1965. A brief, popularized history of the American automobile from its origins until the 1950’s. It focuses strongly on the pioneers in the industry and their interactions. Wolf, Winfried. Car Mania: A Critical History of Transport. Translated by Gus Fagan. Rev. English ed. Chicago: Pluto Press, 1996. Loring Emery Cross-References Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965); The U.S. Government Reforms Child Product Safety Laws (1970’s); American Firms Adopt Japanese Manufacturing Techniques (1980’s); Bush Signs the Clean Air Act of 1990 (1990).

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THE FEDERAL RESERVE ACT CREATES A U.S. CENTRAL BANK The Federal Reserve Act Creates a U. S. CentralBank

Category of event: Finance Time: December 23, 1913 Locale: Washington, D.C. By establishing the Federal Reserve System, the Federal Reserve Act of 1913 provided a central banking arrangement with the potential to improve the functioning of the American economy’s financial sector Principal personages: Carter Glass (1858-1946), the chairman of the House Banking Subcommittee, which formulated the act Henry Parker Willis (1874-1937), a banking expert who assisted Glass in drafting the law; secretary of the Federal Reserve Board, 1914-1918 Robert Latham Owen (1856-1947), the chairman of the Senate Banking Committee; coauthor of the Federal Reserve Act Paul Moritz Warburg (1868-1932), a partner in the investment bank of Kuhn, Loeb & Company; a member of the Federal Reserve Board, 1914-1918 Summary of Event In the wake of the severe financial panic of 1907, the Aldrich-Vreeland Act of May 30, 1908, authorized emergency currency issues and established a National Monetary Commission to study the issue of permanent reform. The commission supported the Aldrich bill of 1911, calling for a banker-controlled single central bank with branches, but public opinion weighed against it. Although the Aldrich bill was not passed, it outlined the 81

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basis for the Federal Reserve Act, enacted into law on December 13, 1913. The act represented the culmination of two decades of debate on how to remedy deficiencies in the American banking system. The preamble to the 1913 law enumerates its goals: to provide for the establishment of Federal Reserve Banks, to supply currency in amounts appropriate to the needs of the economy, to afford means of rediscounting commercial paper, and to establish more effective supervision of banking in the United States. The preamble did not mention discretionary central bank intervention intended to stabilize the economy countercyclically, but this type of intervention became commonplace. The twelve branches of the central bank were expected to operate fairly automatically. Changes in gold reserves would lead to corresponding movements in currency and credit under the rules of the international gold standard then in effect. Federal Reserve bank note and deposit liabilities would automatically expand and contract according to the volume of U.S. business activity. Under the law, banks that were members of the Federal Reserve System would own the Federal Reserve Banks, as they would be required to purchase shares. The member banks would elect six of the nine directors of the system. The Federal Reserve Board, appointed by the president of the United States, would exercise general supervision of the system and implement policy. President Woodrow Wilson would not agree to putting full control of the system in the hands of bankers. Instead, the Federal Advisory Council would make recommendations regarding the operations of the Federal Reserve Board and the Federal Reserve Banks. The council was to be composed of twelve members, with the board of directors of each Federal Reserve Bank electing one member. All national banks, numbering about seventy-five hundred at the time, were required to join the system. Some national banks converted to state charters to avoid joining the system. State-chartered banks were permitted to join, but were not required to do so. At first, very few chose to join, but amendments to the Federal Reserve Act in 1916 made membership more attractive. In response to the amendments and to President Wilson’s appeal to join the system out of patriotism, about nine hundred of the nineteen thousand state-chartered banks joined by the end of 1918.4 Carter Glass, chairman of the House Banking Subcommittee and a key sponsor of the act, never tired of insisting that the Federal Reserve System was not a central bank. The decentralized nature of the system, with twelve separate banks, came as a response to a deep-rooted suspicion of concentrated financial power and hostility to Wall Street financial interests. Central banking had been tried twice before in the United States with mixed success. The Federal Reserve Banks were expected to loosely supervise, rather than strictly control, the monetary system of the United States. 82

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The boundaries of the twelve Federal Reserve Bank districts reflected convenience and how business was conducted at the time. District boundaries split twelve states. Most of Pennsylvania, for example, was in the third district, headquartered in Philadelphia, but the western counties were in the Cleveland district. The Boston district comprised all six New England states, except for Fairfield County, Connecticut, which was part of the New York City district. The system as a whole was under the supervision of the seven-member Federal Reserve Board, appointed by the president. It included the secretary of the treasury and the comptroller of the currency as ex officio members. Two of the five other members were to have experience in finance. That requirement was eliminated in 1922, when the number of freely appointed members was increased to six, so that an “agriculturalist” could be added to the board. Charles S. Hamlin, a Boston lawyer, was the first governor, or head, of the Federal Reserve Board. Frederic Delano, a Chicago railway executive, was the first vice governor. The other appointed members were Paul Moritz Warburg, a partner in the investment banking firm of Kuhn, Loeb & Company; W. P. G. Harding, president of the First National Bank of Birmingham, Alabama; and Adolph C. Miller, professor of economics at the University of California. Miller and Hamlin remained on the board until it was reorganized in 1936. The amount of national bank notes issued previously had depended on the profitability of national bank ownership of government securities. By 1865, a congressional resolution had recognized the need for a paper currency that could change in its amount circulated according to the requirements of legitimate business. The Federal Reserve Act represented a shift from a bond-based to an asset-based currency reflecting the volume of commercial transactions. The amount of currency would expand and contract automatically to meet the needs of trade. To satisfy the followers of William Jennings Bryan, who opposed a strict gold standard, Federal Reserve notes were made obligations of the U.S. Treasury, though they were not given the status of legal tender until 1933. To assure an appropriate volume of currency for each district, each Federal Reserve Bank was responsible for issuing its own notes. Banks that were members of the Federal Reserve System had the right to “rediscount” loans that they had issued, using them in effect as collateral against loans from the Federal Reserve Bank in their district. To simplify this procedure, a 1916 amendment to the Federal Reserve Act permitted advances to member banks secured by this type of collateral or by U.S. government securities. The district reserve banks established the interest 83

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rate charged for discounts and advances “with a view of accommodating commerce and business,” according to the words of the law. In the early years of the system, discount rates varied among the districts, with the rate structure adapting to local conditions. After 1917, the rates tended to uniformity. Loans that were eligible to be discounted, or used as security for loans from the Federal Reserve Banks, were defined elaborately in the law. That definition relied heavily on the commercial loan theory, also known as the real bills doctrine. Loans eligible for discounting were to be self-liquidating; that is, they were not to be speculative but instead were to finance carrying, production, or marketing costs for products that already had been contracted for sale. In order to encourage development of a market in bankers’ acceptances, a source of credit to finance international transactions, the Federal Reserve System stood ready to buy them at favorable rates. Member banks were required to keep reserves against withdrawals by depositors as a safety measure. Mandatory reserves of member banks were lower than previously required of national banks and could be kept as vault cash or deposits at a Federal Reserve Bank. The reduction in required reserves was deemed appropriate in view of the centralization of reserves within the Federal Reserve System and the availability of rediscounting at the Federal Reserve Banks, through which member banks could get cash to meet withdrawals. The 1913 law also distinguished between demand deposits and time (including savings) deposits, requiring a much lower percentage of the latter to be set aside as reserves. Under a June, 1917, amendment, all required reserves had to be in the form of deposits at a Federal Reserve Bank. Vault cash no longer counted, but the percentages of deposits that had to be held as reserves declined dramatically. Later, vault cash would again be counted against the reserve requirement. Impact of Event With the opening in November, 1914, of check-clearing facilities of the twelve Federal Reserve Banks came significant improvements in the payments mechanism. Circuitous, time-consuming arrangements to collect payment on out-of-town checks were no longer needed. Member banks were required to pay the face value of checks drawn against them when those checks were presented for collection at a Federal Reserve Bank. The Federal Reserve System had a goal of making payment of checks at face value, or “par,” universal. That goal was abandoned under pressure from Congress after the Supreme Court declared in 1923 that state laws protecting nonpar payments were constitutional. By the end of 1928, almost four 84

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thousand state banks that were not members of the Federal Reserve System chose to be “nonpar banks.” Ineligible because of this choice to clear checks through the Federal Reserve System, these banks turned to large “correspondent” banks in financial centers to collect out-of-town checks and for other services. Many banks eligible for clearing services through the Federal Reserve System also found it more convenient to use correspondent banks. Member banks, in addition to keeping legal reserves with their local Federal Reserve Bank, continued to keep active balances with correspondent banks. Private banks thus did not abandon their prior relationships to take full advantage of what the Federal Reserve System had to offer. The federal government itself made little use of the Federal Reserve Banks before World War I. The Treasury continued to use national banks as depositories, but beginning in 1916 it increasingly did business through the Federal Reserve Banks. The role of the Federal Reserve System as fiscal agent of the government was enhanced when subtreasuries, an arrangement in effect since 1846, were discontinued in 1921. An amendment to the Federal Reserve Act in September, 1916, allowed advances by Federal Reserve Banks to member banks to be secured by the member banks’ holdings of U.S. government securities. At the time, the federal debt was declining, and most of it served to secure national bank notes. That situation changed radically within a few months as the United States entered World War I. The U.S. Treasury used the Federal Reserve System to finance a swelling national debt on easy terms. Reserve Banks made loans at preferential rates to member banks that in turn made loans to purchasers of war bonds. The Federal Reserve did not regain its freedom to raise the rates it charged on loans to member banks (the discount rate) until November, 1919, after installment payments on the Victory Loan of April, 1919, had been completed. In the face of a severe postwar recession in 1920-1921, the discount rate was not reduced until May, 1921, a year after the index of wholesale prices had peaked. The Federal Reserve Act allowed for open market operations (purchases and sales of government securities by the Federal Reserve System) as a device to make the discount rate effective and to control interest rates in the open market. In 1922, the Federal Reserve System bought $400 million in securities, partly as a means of obtaining earnings so that it could pay the dividends to member banks that were required by law. In 1923, open market operations began to be used as a major instrument to control credit conditions. During the economic downturn between May, 1923, and July, 1924, the Federal Reserve System cut the discount rate and the Open Market Committee authorized purchases of government securities as a means of provid85

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ing banks with reserves that they could then lend out. Similar measures were taken in response to the more mild recession between October, 1926, and November, 1927. The Federal Reserve Banks were expected to act as a “lender of last resort” to member banks, providing loans to financially sound member banks that could not get loans elsewhere. This provision was expected to prevent financial panics, as depositors did not have to worry about banks running short of cash to meet withdrawals as long as those banks were financially sound. The banks could simply discount some of their loans at the local Federal Reserve Bank if they temporarily came up short of cash. The stock market boom of the late 1920’s led Federal Reserve System officials to worry about speculation in the market absorbing excessive amounts of credit. They therefore increased the discount rate in January, 1928, in an attempt to slow speculative lending. They reversed direction and eased credit slightly when stock prices collapsed in the fall of 1929. The system largely stood by, however, as the means of payment (currency plus demand deposits) declined by about one-fourth between 1929 and 1933 and as the American banking system collapsed in the early 1930’s. When banks failed, many depositors lost most or all of their money. Bank runs and losses inflicted on small depositors by bank failures prompted passage of the Banking Act of 1933, which established the Federal Deposit Insurance Corporation (FDIC). Through the FDIC, deposits were insured against bank failure. In 1935, Congress reorganized and significantly strengthened the Federal Reserve System, giving it more centralized control over the American banking system in the hope that greater control could be used to avoid a recurrence of the disaster of the early 1930’s. Bibliography Beckhart, Benjamin Haggott. Federal Reserve System. New York: American Institute of Banking, 1972. A clearly written survey of the structure, functions, and history of domestic and international policies of the Federal Reserve System since its founding. Board of Governors of the Federal Reserve System. The Federal Reserve System: Purposes and Functions. 7th ed. Author, 1984. An official exposition for the general public. Periodically updated. Burgess, Warren Randolph. The Reserve Banks and the Money Market. Rev. ed. New York: Harper & Brothers, 1936. Overview featuring the impact of monetary policy actions on financial markets, written by an expert who was with the Federal Reserve Bank of New York from 1920 to 1938. 86

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Goldenweiser, Emanuel Alexander. American Monetary Policy. New York: McGraw-Hill, 1951. A presentation in straightforward prose by an economist who was director of research and statistics for the Federal Reserve Board from 1926 to 1945. Kemmerer, Edwin Walter. The ABC of the Federal Reserve System. 12th ed. New York: Harper, 1950. A posthumous edition. The core of this lucid, brief exposition was first published in 1918. Laughlin, James Laurence. The Federal Reserve Act: Its Origins and Problems. New York: Macmillan, 1933. A comprehensive investigation presenting a distinctive position in the scholarly controversies surrounding the subject. Moore, Carl H. The Federal Reserve System: A History of the First Seventyfive Years. Jefferson, N. C.: McFarland, 1990. Concise, clear, and interestingly written by an economist associated for thirty-two years with the Federal Reserve Bank of Dallas. Toma, Mark. Competition and Monopoly in the Federal Reserve System, 1914-1951: A Microeconomics Approach to Monetary History. New York: Cambridge University Press, 1997. Warburg, Paul Moritz. The Federal Reserve System: Its Origin and Growth. 2 vols. New York: Macmillan, 1930. A collection of writings by the German-born banker who labored indefatigably for central bank reform and sound practice. West, Robert Craig. Banking Reform and the Federal Reserve, 1863-1923. Ithaca, N.Y.: Cornell University Press, 1977. A scholarly monograph on the intellectual background to the Federal Reserve Act. Willis, Henry Parker. The Federal Reserve System. New York: Ronald Press, 1923. An insider’s in-depth view. Willis helped draft the Federal Reserve Act. Benjamin J. Klebaner Cross-References The U.S. Stock Market Crashes on Black Tuesday (1929); The Banking Act of 1933 Reorganizes the American Banking System (1933); The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); Congress Deregulates Banks and Savings and Loans (1980-1982); Bush Responds to the Savings and Loan Crisis (1989).

87

THE PANAMA CANAL OPENS The Panama Canal Opens

Category of event: Transportation Time: August 15, 1914 Locale: Panama The completion and opening of the Panama Canal significantly lowered shipping costs and improved transit time Principal personages: Ulysses S. Grant (1822-1885), the president of the United States, 1869-1877; initiated exploration in Panama George Washington Goethals (1858-1928), the director of the Panama Canal project Ferdinand de Lesseps (1805-1894), a French pioneer of the canal project Theodore Roosevelt (1858-1919), the president of the United States, 1901-1909 Summary of Event Early maps were based as much on belief as on facts. When Christopher Columbus searched for a new route to the Orient, he happened to land first in the West Indies. The people there told him stories about a strait through which one might sail westward into waters that led directly to the land he sought. He believed in these stories and sought that strait, in the process coming closer and closer to the North American continent. His belief in the secret strait is reflected in a map inspired by him, though not published until two years after his death. The map has no isthmus of Panama, showing in its place a strait permitting direct passage from Europe to India. Vasco Nunez de Balboa followed Columbus with exploration of the isthmus, ultimately discovering the Pacific Ocean. Even at that time, the legend of the strait persisted. Native people told Balboa that a newly discovered isthmus provided a connection between the oceans. Balboa also believed the story. Many explorers and geographers accepted the existence 88

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of this unseen strait, leading to exploration up and down the coast. Explorers never found the mysterious strait, but their work spawned the idea of digging a waterway to connect the two oceans. The Panama Canal therefore is not entirely a project of the nineteenth and twentieth centuries. Its conception falls back to a much earlier time, in particular to a proposal given to Charles V of Spain in 1523. It was, in fact, Hernán Cortés, the Spanish conqueror of Mexico, who first proposed constructing this great waterway. When Cortés failed to find the legendary strait, he proposed constructing an artificial waterway. The creation of the Panama Canal thus represents a historical legacy as well as an unprecedented feat of engineering and design. It became a major transportation link, facilitating direct trade and changing the face of the political and economic world. It has critical historic dimensions, as it represented the largest, most costly single effort attempted in modern times. The canal’s construction held much of the world’s attention over a span of forty years, affecting the lives of tens of thousands of people at almost every level of society and of many races and nationalities. The nations involved were much affected by the process. The Republic of Panama was born; Colombia lost its prize possession, the Isthmus of Panama; and Nicaragua was left to wait for some future chance to participate in such a venture. The Panama Canal marked significant advances in engineering, in government planning, and in labor relations. Planning focused on the construction of an enduring wonder, a canal of unprecedented length and breadth. Its construction and operation would require considerable government planning and direction as well as an unheralded organization of large numbers of laborers. The canal was born of the conviction that sea power would become the political and economic base for the future. It was judged to be the greatest enterprise of the Victorian era and the first significant demonstration of American power at the dawn of the new century. Its completion in 1914 marked the conclusion of a dream as old as the voyages of Columbus. The cost of the canal was enormous. Dollar expenditures totaled $352 million, including $10 million paid to Panama for land rights and $40 million paid to the French company involved in the original canal project. The cost was more than four times that of the Suez Canal and much higher than the cost of anything previously built by the United States government. Except for wars, the only remotely comparable federal expenditures up to the year 1914 had been for acquisition of new territories. The price for all acquisitions as of that date—the Louisiana Territory, Florida, California, New Mexico, and other western lands acquired from Mexico, Alaska, and the Philippines—was $75 million, or only about one-fifth of the amount 89

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President Theodore Roosevelt (center) during an inspection tour of canal work in 1906. (Library of Congress)

spent on the canal. French companies earlier had been involved in the canal project, beginning in 1880. Taken together, French and American expenditures came to almost $639 million. The canal also involved nonmonetary costs. According to hospital records, more than 5,600 lives were lost to disease and accidents during the canal’s construction. Approximately 4,000 deaths were those of black workers, with only 350 white Americans dying in the process. If one includes earlier French efforts, the total loss of human lives may have been as high as 25,000. Unlike most government projects, the canal cost less in dollars than was projected. The final price was $25 million below what had been estimated in 1907, despite a change in the width of the canal and the building of 90

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fortifications. Had these additional expenses been calculated into original budgets, Congress might not have approved the project. The Spooner Act of 1902 approved a $40 million payment to the French company involved in the original canal project, but Colombia, which controlled Panama, stood in the way of further construction. Panama declared its independence from Colombia on November 3, 1903. Construction of the canal by the U.S. team began in 1904. Even though it was completed at a cost below that estimated at mid-project, the canal was opened six months ahead of schedule. The final product came amazingly close to precise engineering targets as to location, structure, and operation. There were no signs of graft, kickbacks, payroll padding, or other corruption in the process. Successful completion of such a vast project is noteworthy, since most previous and subsequent projects had shortcomings in the dimensions mentioned above. Much of the project’s success resulted from the management and expertise of the director of the project. George Washington Goethals exhibited considerable insight in the design of the project, considerable influence in coordinating the various constituencies affected by and involved in the project, and unusual management control techniques used to monitor expenditures and progress. No excessive profits were registered by the thousands of firms involved with a project under the auspices of the Interstate Commerce Commission. Impact of Event Much of the history of the world is based on the quest for improved transportation, particularly the discovery of and building of all-water routes connecting bodies of water. With the completion of the canal came direct and lower-cost transportation from the Atlantic Ocean to the Pacific Ocean. Savings came in terms of both dollar outlays and time. The cost savings that resulted from the canal encouraged businesspeople to explore new markets that now appeared to be profitable. World War I kept the traffic flow through the canal low, with only four or five ships passing through per day, on average. It was not until July, 1919, that the vision of President Theodore Roosevelt came true by virtue of the transit of an American armada of thirty-three ships through the canal. The first thirty made it through in only two days. This was an astounding feat given the rigors of the previous route around the tip of South America. About ten years after it opened, the canal was handling more than five thousand ships a year, traffic approximately equal to that of the Suez Canal. Even then, large British and U.S. carriers squeezed through the locks with only feet to spare. By the late 1930’s, annual traffic exceeded seven thousand ships. Following World War II, that figure more than doubled. Channel 91

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lighting was installed in 1966, allowing nighttime transit, and ships were going through the canal at the rate of more than one an hour, twenty-four hours a day, every day of the year. Many of them were giant container and bulk carriers of a size never imagined when the canal was designed and built. The 950-foot Tokyo Bay was the largest container ship in the world at the time it made its first Panama Canal transit in 1972. By the 1970’s, traffic reached fifteen thousand ships a year, with annual tonnage well beyond 100 million tons, twenty times that of 1915. Clearly, shippers were taking advantage of the improvement in transport speed made possible by the canal. The canal made feasible the opening of Far Eastern markets to the East Coast of the United States. It can be argued that the facilitation of trade allowed by the canal markedly altered the configuration of world industrial patterns. The Queen Mary, launched in 1934, was the first ship too large for the locks. Many others followed, even though the builders realized at the time of construction that ships of more than 1,000 feet in length and beams of 150 feet could not pass through the canal. Proposals to find an alternate route or to build a larger canal were considered. Attention was once again given to Nicaragua and a route through that nation. Earlier proposals for an isthmus canal had considered Nicaragua. Tolls collected in 1915 reached only $4 million. In 1970, they exceeded $100 million, even though rates remained unchanged. In 1973, the Panama Canal Company recorded its first loss, largely as a result of mounting costs of operation. In 1974, tolls were raised for the first time, from $0.90 per cargo ton to $1.08. The Queen Elizabeth II locked through the canal in 1975 and paid a record toll of $42,077.88. The average toll per ship was approximately $10,000, approximately one-tenth of the cost of sailing around Cape Horn as an alternate direct all-water route. The lowest toll on record was paid by Richard Halliburton, a world traveler who in the 1920’s swam the length of the canal in installments. Although he was not the first to swim the canal, he was the first to persuade authorities to allow him through the locks. In design matters, some changes were made in the canal over time. Parts were widened by up to 500 feet; a storage dam was built across the Chagres; and the original towing locomotive was retired and replaced by more powerful models. The fundamental characteristics of the canal remained unchanged. Only two issues of design received significant criticisms. It has been argued that the two sets of locks should have been replaced by a single unit at Miraflores, and Goethals seemed to have underestimated the impact of slides. The canal has been influenced by slides on many occasions. In 1914, a slide at East Culebra caused blockage of the entire channel. Slides have posed a continuing problem. 92

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As ships grew in size, the canal handled a lower proportion of the world’s sea traffic. By provisions of the 1977 Panama Canal Treaty, the canal itself was scheduled to be turned over to the Panamanian government. The Canal Zone was abolished, and all U.S. troops were to be removed before December 31, 1999, when the Panamanian government took over the canal. The all-water passage across Panama is a supreme achievement. It completed a dream held through hundreds of years. Its impact has been enhanced East-West trade, shorter times in transit, a dedication to technological improvement in transportation, and a unification of political and economic interests in the Eastern and Western worlds. Bibliography Brands, H. W. T. R.: The Last Romantic. New York: Basic Books, 1997. Iconoclastic biography of Theodore Roosevelt. Gause, Frank Ales, and Charles Carl Carr. The Story of Panama. 1912 Reprint. New York: Arno Press, 1970. A comprehensive analysis of the development of the Panama Canal, drawn from materials prepared at the time. Harmon, George M., ed. Transportation: The Nation’s Lifelines. Rev. ed. Washington, D.C.: Industrial College of the Armed Forces, 1968. Some general comments about the developing role of the transportation infrastructure, including the Panama Canal. Kemble, John H. The Panama Route: 1848-1869. Berkeley: University of California Press, 1943. Covers the entirety of the construction and operation process. McCullough, David. The Path Between the Seas. New York: Simon & Schuster, 1977. A readable and comprehensive coverage of the building of the canal, including many interesting statistics and helpful perspectives. Marlowe, John. The World Ditch. New York: Macmillan, 1964. A readable coverage of the canal and its impacts. Mellander, Gustavo A., and Nelly Maldonado Mellander. Charles Edward Magoon: The Panama Years. Río Piedras, P.R.: Editorial Plaza Mayor, 1999. Biography of an early governor of the Panama Canal Zone. Theodore O. Wallin Cross-References The General Agreement on Tariffs and Trade Is Signed (1947); The United States Suffers Its First Trade Deficit Since 1888 (1971); The Alaskan Oil Pipeline Opens (1977); The North American Free Trade Agreement Goes into Effect (1994). 93

THE FEDERAL TRADE COMMISSION IS ORGANIZED The Federal Trade Commission Is Organized

Category of event: Government and business Time: September 26, 1914 Locale: Washington, D.C. Creation of the Federal Trade Commission (FTC) empowered an agency of the federal government to protect competition and proactively deter potential monopolies Principal personages: Theodore Roosevelt (1858-1919), the president of the United States, 1901-1909 Woodrow Wilson (1856-1924), the president of the United States, 1913-1921 Louis D. Brandeis (1856-1941), an economic adviser to President Wilson George Rublee (1868-1957), an attorney who assisted in drafting the FTC bill Summary of Event The establishment of the Federal Trade Commission (FTC) in 1914 signaled a dramatic change in the relationship between government and business. No longer would the courts and the executive branch be the only interpreters of antitrust legislation; instead, the independent regulatory commission was empowered to define “unfair competition” and was also granted the requisite discretionary authority to apply the standard of unfairness. Although enacted in 1914, the Federal Trade Commission Act can trace 94

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its roots to the late nineteenth century. It was the exercise of corporate economic power in that period by men such as John D. Rockefeller, J. P. Morgan, and Cornelius Vanderbilt that seemed to galvanize an antibusiness sentiment among small business owners, labor unions, and the middle class. These groups would become the core of the Progressive movement. The turn of the century witnessed the beginning of the Progressive Era, characterized by the use of social, economic, and political reform movements aimed at creating a society organized for collective action in the public interest. In 1901, Theodore Roosevelt advocated the supremacy of the “public interest” over business when he assumed the presidency. In 1903, the newly created Department of Commerce contained a Bureau of Corporations with a function of investigating corporate practices and publicizing unethical competitive methods of businesses. A series of informal agreements evolved between big business and the bureau, under which firms granted the government access to their records and the bureau approved mergers when it found them to be in the public interest. During the Progressive Era, there developed a clear sense of obligations of business to society. The role of the state started to evolve from laissezfaire to the belief that it had a moral obligation to provide for the general welfare. It was during the first administration of Woodrow Wilson that the Bureau of Corporations was transformed into the FTC. Wilson and the Democrats swept the country on election day in November of 1912. A key component of the winning party platform was a program Wilson called the New Freedom, aimed at the destruction and prevention of industrial and financial monopoly. Wilson proposed to accomplish this goal by reducing tariffs, reforming the banking and currency systems, and strengthening the Sherman Antitrust Act. A tariff reduction bill was quickly passed, and the Federal Reserve System was created in 1913. The last major item on the New Freedom agenda was the creation of legislation to strengthen the Sherman Act. The Sherman Act of 1890 to this point was the sole federal antitrust legislation. It did not enumerate specific monopolistic behaviors, instead declaring as illegal any contracts, combinations, and conspiracies in restraint of trade. The act’s vagueness ultimately left determination of the meaning of its prohibitions to the courts. The attorneys general of the 1890’s were reluctant to exercise their discretionary authority to initiate prosecutions under the act’s provisions. The act was further weakened by the Supreme Court’s promulgation of the “rule of reason” in the Standard Oil and American Tobacco cases of 1911. The Court held that only “unreasonable” restraints of trade were illegal. The first response in an attempt to strengthen the Sherman Act was the 95

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Clayton bill. Drafted by Representative Henry Clayton, it attempted to overcome the vagueness of the Sherman Act and the rule of reason by enumerating specific illegal business practices. Prohibited acts included discriminatory pricing, tie-in selling, exclusive dealing, and interlocking directorates. These acts were deemed illegal per se, regardless of their reasonableness. The political compromises necessary to obtain passage of the bill led to an act with provisions that were easily circumvented. The act was signed into law three weeks after the Federal Trade Commission Act, on October 15, 1914. President Wilson described the Clayton Act as “so weak you cannot tell it from water.” A major cause of concern was that the primary responsibility for enforcement remained with the Department of Justice and the judicial system. Originally, neither Wilson nor his primary economic adviser, Louis D. Brandeis, supported the concept of a strong trade commission. Wilson at first proposed the creation of an agency that would moderate but not unduly restrict business. In keeping with this philosophy, the administration supported a bill introduced by Representative James Covington that envisioned a commission that would secure and publish information, conduct investigations as requested by Congress, and support methods of improving business practices and antitrust enforcement. This proposal submitted to Congress, to create an advisory commission, was transformed into an act creating a powerful commission with broad regulatory powers. This metamorphosis can be attributed to the inability to pass a strong version of the Clayton Act and the pragmatic difficulty of specifying all unlawful trade practices. Faced with these difficulties, Wilson, in consultation with congressional leaders, decided on a new strategy that would abandon a legislative solution for an administrative one. The new strategy was greatly influenced by George Rublee, a former member of the Progressive Party called in by Wilson to assist in the drafting of antitrust legislation when Brandeis was occupied by an Interstate Commerce Commission rate case. Rublee’s intervention and the deadlock over the Clayton bill were primary factors in the creation of a regulatory agency as the primary method of restraining the activities of business. The FTC Act was signed into law on September 26, 1914. The newly created commission had two major duties: to see that unfair methods of completion were prevented and to keep the public and Congress informed as to developments within an industry that threatened competition. This mission would be carried out by the utilization of the agency’s three major powers: the cease and desist order, the stipulation, and the trade practice conference. The FTC was structured as an independent regulatory commission with five members (no more than three from the same political 96

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party) serving staggered seven-year terms, appointed by the president and confirmed by the Senate. Creating a bipartisan, independent commission with broad discretionary authority was viewed as a radical step in the government’s attempts to control and regulate business. The FTC was to become perhaps the most controversial of the independent regulatory commissions, and its broad discretionary powers the primary source of the controversy. Impact of Event In assessing the impact of the FTC, it is necessary to analyze both the political and pragmatic consequences associated with its creation. Politically, the FTC represented the institutionalization of the widespread public opinion that competition was beneficial and an integral part of the American economy. It further inexorably altered the relationship between the federal government and the private sector. The commission represented a continuing repudiation of the laissez-faire doctrine, which commenced with the creation of the Interstate Commerce Commission in 1887. The FTC was a permanent administrative apparatus, granted broad statutory powers, discretionary authority, and a jurisdiction not limited to a specific industry. These delegations of authority created an agency that could attack economic and societal problems without reliance on the judicial or executive branches of government to initiate antitrust actions. As an independent regulatory commission, the FTC combined the functions of policy-making, administration, and adjudication. The agency set precedents for the evolution of the administrative state in America. Starting in the late nineteenth century and continuing into the 1970’s, the federal government became increasingly involved in regulating industries and activities. The creation of the FTC was surrounded by great controversy, and the commission is one of the most studied of federal agencies. The major source of the controversy is the FTC’s broad legislative delegation of authority. Section 5 of the FTC Act defines the commission’s primary reponsibilities as identifying and preventing “unfair methods of competition” by issuing enforceable cease-and-desist orders. Section 6 outlines eight additional powers: to investigate corporations, to request reports from corporations, to investigate compliance with antitrust decrees, to conduct investigations for the president or Congress, to recommend business adjustments to comply with law, to make public the information obtained, to classify corporations, and to investigate conditions in foreign countries that affect trade. The Wheeler-Lea Act (1938) amended the FTC Act to empower the agency to protect the consumer as well as to promote competition. A 1974 amendment expanded the commission’s jurisdiction from 97

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“methods, acts, practices in commerce” to “ methods, acts, practices affecting commerce.” The discretionary authority granted the FTC proved to be a doubleedged sword. Discretion theoretically allowed action in numerous areas with various tools, but it also allowed the agency to choose to take no action. It is the perceived failure of the FTC to exercise its discretion in the form of action that has been the source of much criticism. The commission has been accused of misallocating its resources toward minor issues and failing to take action on substantial matters. Critics argue that the cases investigated involved minor matters with only minimal impact on the economy or the public interest. The agency’s broad mandate has contributed to its inability to articulate definite goals, objectives, and standards of performance. The absence of direction left the commission rudderless in a complex environment. The FTC has also been accused of failing to detect violations, since its primary means of detecting deceptive practices is to wait for a businessperson to inform on practices of competitors. The failure to establish priorities led to the commission handling too many cases, the vast majority having little impact on the public interest. The FTC has been accused of failing to exercise enforcement powers, all too often relying on voluntary correction of behavior. The agency was also accused of allowing its power to dissipate by allowing unreasonable time lapses from investigation to final decision. During the period of investigation, the FTC has no punitive power to discourage illegal behavior, and many firms continued their behavior until actual sanctions were imminent. Delay also undermines a major goal of the FTC, that of preventing unfair practices. The delay in starting agency proceedings is primarily a function of poor staff work, raising the issue of the efficacy of FTC personnel. Critics question the ability of staff and cite the high turnover rate among FTC personnel. The FTC was born of political compromise, with no consensus as to the agency’s mission, and as such it has been exposed to shifting political winds. The FTC was created as an independent, bipartisan regulatory commission, but too often the FTC employs or promotes the politically well connected and allocates resources to marginal issues solely because of requests by members of Congress. The FTC is not without its advocates, who are as vigorous as its critics. Criticisms of personnel and actions, they argue, should have produced significant reform if valid. Defenders of the FTC counter that incompetence is asserted but not proven. Allegations that the absence of precise standards has led the commission to concentrate on smaller firms is rebutted by citing incidents in which the commission has been both innovative and coura98

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geous. Proponents of the FTC further state that its activities are severely hampered by the lack of financial resources in comparison to the vast array of tasks allocated to the FTC. The speed at which the commission resolves cases is defended by reminding critics that the FTC is bound by procedures of due process. In the final analysis, the evaluation of the impact of the FTC on the American economy, society, and public interest is probably a function of one’s expectations of the commission and perceptions of the optimal level of governmental involvement in the private sector. FTC advocates demand greater involvement in reaction to evils of business, while critics view any action as tampering with the market system. Bibliography Blackford, Mansel G., and Austin K. Kerr. Business Enterprise in American History. 2d ed. Boston: Houghton Mifflin, 1990. Provides a concise coverage of the history of the American business firm and the evolution of government-business relations, from colonial times to the present. Clements, Kendrick A. The Presidency of Woodrow Wilson. Lawrence: University Press of Kansas, 1992. Provides a brief coverage of the Wilson presidency. Valuable for highlighting major issues in a direct and concise manner. The coverage of major domestic issues (chapter 3) is especially pertinent. Cox, Edward, Robert C. Fellmeth, and John E. Schulz. The Nader Report on the Federal Trade Commission. New York: Richard W. Baron, 1969. Represents a scathing criticism of the Federal Trade Commission’s operations, highlighting its failures, politicization, and attempts to mask inefficiency. Green, Mark J. The Closed Enterprise System. New York: Grossman Press, 1972. Analyzes the impact of the FTC on American antitrust policy. Link, Arthur. Woodrow Wilson and the Progressive Era, 1910-1917. New York: Harper, 1954. Addresses the political and diplomatic history of the United States from the disruption of the Republican Party in 1910 to the entrance of the United States into World War I. Provides excellent coverage of America’s transitionary reform period and the increasing role of government in society. Stid, Daniel D. The President as Statesman: Woodrow Wilson and the Constitution. Lawrence: University of Kansas Press, 1998. Stone, Alan. Economic Regulation and the Public Interest. Ithaca, N.Y.: Cornell University Press, 1977. Presents an analysis of the Federal Trade Commission in theory and practice, and provides an objective analysis of the agency’s strengths and weaknesses. 99

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Wilson, James Q., ed. The Politics of Regulation. New York: Basic Books, 1980. Wilson and other contributors analyze the politics of the major regulatory agencies. Of special interest is Robert A. Katzmann’s chapter on the FTC, which presents an unconventional explanation of the agency’s political behavior. Eugene Garaventa Cross-References Champion v. Ames Upholds Federal Powers to Regulate Commerce (1903); Congress Passes the Clayton Antitrust Act (1914); The CellerKefauver Act Amends Antitrust Legislation (1950); Carter Signs the Airline Deregulation Act (1978); Congress Deregulates Banks and Savings and Loans (1980-82); AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement (1982).

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CONGRESS PASSES THE CLAYTON ANTITRUST ACT Congress Passes the Clayton AntitrustAct

Categories of event: Monopolies and cartels; government and business Time: October 15, 1914 Locale: Washington, D.C. With the passage of the Clayton Antitrust Act in 1914, the federal government further codified the prohibitions against unlawful restraints of trade and monopolies Principal personages: Woodrow Wilson (1856-1924), the president of the United States, 1913-1921 Louis D. Brandeis (1856-1941), a well-known public advocate who influenced Wilson’s antitrust policy Henry D. Clayton (1857-1929), the U.S. representative from Alabama who proposed the Clayton antitrust bill Theodore Roosevelt (1858-1919), the president of the United States, 1901-1909, and presidential candidate in 1912 Arsène Pujo (1861-1939), a U.S. representative from Louisiana who chaired the House subcommittee on the “Money Trust” Summary of Event On October 15, 1914, Congress passed and President Woodrow Wilson signed the Clayton Antitrust Act (H.R. 15657). This law was designed to strengthen the Sherman Antitrust Act of 1890 by fully codifying specific illegal antitrust activities. The Clayton Act forbade a corporation from purchasing stock in a competitive firm, outlawed contracts based on the condition that the purchaser would do no business with the seller’s competitors, and made interlocking stockholdings and directorates illegal. It also contained provisions designed to make corporate officers personally re101

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sponsible for antitrust violations. The Clayton Act also declared that labor unions were not conspiracies in restraint of trade, thus exempting them from provisions of the bill. To carry out and enforce the Clayton Act and the Sherman Act, Congress created the Federal Trade Commission in a related measure. For more than a decade after its passage, the Sherman Antitrust Act of 1890 had very little effect upon corporations in the United States. President Theodore Roosevelt, however, pushed enforcement of the Sherman Act. In 1902, the Roosevelt Administration brought suit against the giants of the railroad industry and the “Beef Trust.” The Supreme Court ordered dissolution of the Morgan-Hill-Harriman railroad holding company in the Northern Securities case (1904); in the case of Swift & Company v. United States (1905), the Supreme Court enjoined the “Beef Trust” from engaging in collusive price-fixing activities. In 1906 and 1907, Roosevelt had the Justice Department bring suit against the American Tobacco Company, the E.I. Du Pont Chemical Corporation, the New Haven Railroad, and the Standard Oil Company. The Supreme Court ordered the dissolution of the American Tobacco (1910) and Standard Oil (1911) companies. Between 1890 and 1905, the Department of Justice brought twenty-four antitrust suits; the Roosevelt Administration brought suit against fifty-four companies. The single administration of William Howard Taft later prosecuted ninety antitrust cases. Despite this increase in federal antitrust regulation and prosection, the trend toward large corporations grew. The economic concentration that had increased dramatically in the late nineteenth century continued to increase in the early twentieth century. The greatest period of business mergers in the United States occurred during the William McKinley Administration, from 1897 to 1901. Between 1896 and 1900, there were approximately two thousand mergers, with nearly twelve hundred mergers occurring in 1899. Business consolidations took place in phases after that. Between 1904 and 1906, there were roughly four hundred mergers; between 1909 and 1913, there were more than five hundred mergers. During this time of increasing economic concentration, interlocking directorates increased. An interlocking set of directorates involves individuals serving on the boards of directors of several corporations, particularly within the same industry. By 1909, 1 percent of the industrial firms in the United States produced nearly half of its manufactured goods. By 1913, two financial groups, the investment banking firm of J. P. Morgan and the interests of John D. Rockefeller, held 341 directorships in 112 corporations with an aggregate capitalization of more than $22 billion. These facts and many others were made public by the House of Representatives subcom102

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Part of President Woodrow Wilson’s appeal to voters was his reputation as a trust buster. (Library of Congress)

mittee on the “Money Trust” in the summer of 1912. Led by Representative Arsène Pujo (D-Louisiana), the hearings heightened existing public fears about economic concentration and intensified the political debate over the trust issue during the presidential campaign of 1912. Louis Brandeis, a Boston attorney who had developed a reputation for being the “people’s lawyer,” greatly influenced Democratic presidential candidate Woodrow Wilson’s policies on business trusts and government regulation. Brandeis often represented small- and medium-sized manufacturers, retailers, and wholesalers and had developed a philosophy he believed would protect them against the actions of their larger competitors. Brandeis met Wilson in the summer of 1912, and later advised Wilson on matters of banking reform, monopoly and antitrust policy, and a trade commission to enforce existing antitrust laws. Brandeis also publicized his regulatory philosophy in a series of articles appearing in Harper’s Weekly entitled “Other People’s Money and How the Bankers Use It.” Coming in the wake of the Pujo Committee hearings, these articles further directed public attention to the issues of banking reform, antitrust, and economic concentration. Brandeis denounced combinations and trusts of all kinds, including interlocking directorates. In the 1912 presidential campaign, Theodore Roosevelt, in his attempt to regain the presidency, proposed an increase in governmental agencies to regulate large corporations. Agencies would police certain corporate ac103

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tions rather than focusing on corporate size. Roosevelt believed that large corporations could be more efficient than smaller businesses and that unlimited competition could be devastating to corporations and ultimately to the economy. His Progressive/Bull Moose Party platform advocated a trade commission to begin a cooperative regulatory approach. Wilson, influenced by Brandeis and to some extent by former Populist/Democratic presidential candidate William Jennings Bryan, opposed bigness in general, both in business and in government. Wilson favored dissolutions such as those of Standard Oil and American Tobacco. He believed that such large corporate monopolies squeezed economic opportunity away from smaller or medium-sized businesses. For much of the 1912 campaign, Wilson failed to propose an antitrust agency or trade commission, as Roosevelt did. Toward the end of the campaign, and certainly once in office, Wilson came to support positions on the issues of antitrust and a trade commission that were closer to those of Roosevelt. The general public wanted increased regulation of large corporations, but businesses of all sizes wanted a clarification and further codification of the Sherman Antitrust Act. Both small and large businesses wanted a clear line between legality and illegality to be embodied in legislation and enforced by a trade commission that would work with the private sector. What the business community opposed was being subject to the unpredictable policies of the Justice Department and the shifting jurisprudence of the Supreme Court. That court had clouded the already vague standards and definitions of antitrust with its decisions in the Standard Oil and American Tobacco cases. In those cases, the Supreme Court ruled that not every restraint of trade was illegal in terms of the Sherman Act. The Supreme Court had ruled in the Standard Oil case that it would determine whether combinations restrained trade rather than using size alone as a criterion of noncompetitive behavior. Firms would be within the law, through the “rule of reason,” no matter how large they were, if they did not engage in “unreasonable” behavior. The main objectives of additional antitrust legislation were thus clear: to obtain statutory specifics on antitrust prohibitions, to make monopolistic price-fixing agreements and price discrimination illegal, and to eliminate interlocking directorates. After obtaining legislation on tariff and banking reform in 1913, Wilson turned his attention to antitrust in 1914. In his message to Congress of January 20, 1914, Wilson stated that although further antitrust legislation would make a number of activities illegal, the main purpose was to help businesses remain within the bounds of legality. “Nothing hampers business like uncertainty,” said Wilson. “The best informed men of the business world condemn the methods and processes and consequences of monopoly 104

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as we condemn them.” With this presidential support, two days later Representative Henry D. Clayton (D-Alabama) introduced four bills in the House to amend the Sherman Act. Proposed antitrust bills and trade commission bills developed from February through June as the House Judiciary Committee and the Senate Interstate Commerce Committee held hearings. Although businesses wanted antitrust clarification, some provisions of the developing Clayton bill alarmed smaller and “peripheral” businesses, which often engaged in trade or associational activities and price agreements initially prohibited by the bill. Businesses such as merchants, grocers, small manufacturers, and retailers desired prosection of “unfair price competition” engaged in by larger firms. Conversely, these peripheral businesses feared government prosecution of trade association activities that included “fair-price agreements” designed to ensure profitability. Smaller businesses had been hit especially hard by federal antitrust policies in the past. From 1905 to 1915, seventy-two antitrust cases had been against these peripheral businesses; fewer than thirty had involved the largest firms. Under pressure from business groups such as the U.S. Chamber of Commerce, the Chicago Chamber of Commerce, and the National Association of Manufacturers, Congress amended the bill. The Clayton Act illegalized price discrimination but attached amendments that gave businesses considerable allowances and exemptions. Other amendments undermined the strength of the bill. The prohibition against corporate mergers in the Clayton Act was modified to apply only in those cases in which merger tended to decrease competition, a vague standard open to judicial interpretation. The exemption of labor unions under the Clayton Act was equivocal and subject to judicial review. It was in fact the intention of Congress and the Wilson Administration to allow the courts to settle the ambiguity of the new antitrust law. As a consequence, federal courts often ruled that the Clayton Act was inapplicable to business mergers, and labor unions found that they had no more protection under the Clayton Act than they had before. In its final form, the Clayton Act prohibited a corporation from discriminating in price between purchasers, engaging in exclusive sales, and tying purchases of one good to purchases of another if the effect of any of these actions was “to substantially lessen competition or tend to create a monopoly,” a standard open to broad judicial interpretation. Executives, directors, and officers of a corporation were made personally liable for corporate antitrust violations. The Clayton Act also prohibited one corporation acquiring the stock of a competitor or a holding company acquiring the stock of two competitors if such acquisition would substantially lessen competition, restrain commerce, or tend to create a monopoly; these were again 105

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standards open to judicial review. The Federal Trade Commission Act, also passed in 1914, transferred the functions of the United States Bureau of Corporations to the Federal Trade Commission (FTC) and authorized the FTC, among other duties, to issue cease-and-desist orders enjoining “unfair methods of competition and commerce.” Impact of Event The Clayton Act proved to be an enduring piece of legislation, and it has been strengthened a number of times since its passage. Just after its passage, however, the antitrust movement began to fade away. The great period of antitrust activity in the United States began in the McKinley Administration and peaked under President Taft. The Wilson Administration brought fewer antitrust suits than did either the Roosevelt or the Taft administrations. Late in 1914, Wilson stated that he believed federal regulation had gone far enough. The president viewed the Clayton Act as the concluding act in the antitrust movement. “The reconstructive legislation which for the last two decades the opinion of the country has demanded,” stated Wilson, “has now been enacted.” At least as important, however, was the fact that foreign policy and World War I increasingly demanded Wilson’s attention. Many historians have contended that although the antitrust movement had reached a natural decline, World War I further undermined it. War mobilization required the coordinated efforts of leaders of each industry. Economic concentration and collusive efforts were necessary and accepted for the war effort. For example, in early 1918 the Fuel Administration, a wartime agency, suppressed an attempt by the Federal Trade Commission to begin litigation against Standard Oil of Indiana for violation of the Clayton Antitrust Act. Some economic historians contend that the Clayton Act actually promoted economic concentration. The Clayton Act clarified illegal actions, thereby helping to eliminate some monopolistic activities, but in so doing it allowed business combinations and trusts to engage in collusive activities not specifically prohibited. By codifying illegal behavior, Congress tacitly sanctioned other collusive activities designed to reduce chaotic competition and ensure stability. Large corporations such as General Motors and the Du Pont Chemical Company grew much larger just immediately after the Clayton Act and especially during the war effort. Desire for further antitrust reform was rekindled, briefly, by the federal New Deal response to the Great Depression of the 1930’s. The Public Utilities Holding Company Act of 1935 prohibited public utility systems with more than three tiers of companies and designated the Securities and Exchange Commission to regulate their size and finances. The Robinson106

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Patman Act of 1936 and the Miller-Tydings Act of 1937 both supplemented the Clayton Act by attempting to protect small business from wholesalers that practiced price discrimination and by establishing “fair trade” price floors on numerous items. In 1938, Congress created the Temporary National Economic Committee to hold hearings on the issue of antitrust. Attorney General Thurman Arnold reinvigorated federal antitrust prosecution. Arnold brought a number of antitrust suits, notably against General Electric and the Aluminum Company of America. Like the earlier antitrust effort of the Progressive Era, this campaign lost its strength and direction as a result of foreign policy concerns and economic mobilization for a war effort. There have been some important antitrust cases since World War II. In 1945, the Aluminum Company of America was found to be in violation of the Sherman Antitrust Act. In 1948, the federal government forced a number of major U.S. film studios to divest themselves of studio-owned theaters. In 1961, the Supreme Court ordered the Du Pont Company to divest itself of its holdings in General Motors Company. In 1967, the Federal Communications Commission ordered the American Telephone and Telegraph Company (AT&T) to lower its rates. In 1982, after eight years of battling a private antitrust suit in federal court, AT&T agreed to be broken up, and a number of rival long-distance communication companies came in to challenge AT&T’s control over the market. In 1950, the Celler-Kefauver Act extended the Clayton Act by tightening prohibitions on business mergers that lessen competition and lead to monopoly. In 1976, Congress passed the Hart-Scott-Rodino Act, or Concentrated Industries Act. This was a mild reform law that attempted to strengthen provisions of existing antitrust laws. Clearly, monopolistic behavior remained a fact of American economic life, but federal prosecution of anticompetitive mergers and acquisitions had become rare. Bibliography Blum, John Morton. “Woodrow Wilson and the Ambiguities of Reform.” In The Progressive Presidents: Theodore Roosevelt, Woodrow Wilson, Franklin D. Roosevelt, Lyndon Johnson. New York: W. W. Norton, 1980. Good for an introduction to progressive policies and politics, as well as foreign policies, of Roosevelt and Wilson. Has a concise section on the development of Wilson’s legislative reform efforts, especially the Clayton Act and the Federal Trade Commission. Clark, John D. The Federal Anti-Trust Policy. Baltimore: Johns Hopkins University Press, 1931. This work is analytical, detailed, and still brief enough to be of use both to those seeking an introduction to the topic of 107

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antitrust at the federal level and to those with some familiarity with the topic. Contains the varying economic analyses of the time and a chapter on the Clayton and Federal Trade Commission acts. Kolko, Gabriel. The Triumph of Conservatism: A Re-interpretation of American History, 1900-1916. New York: Free Press of Glencoe, 1963. Presents an interpretation challenging the standard view of progressive regulation and business-government relationships in the early twentieth century by showing the ways in which businesses desired and influenced regulatory legislation as a means to achieving their own goal of ending cutthroat competition and stabilizing industries. Contains a lengthy section on the development of the Federal Trade Commission and the Clayton Act in this vein. Link, Arthur S. Wilson: The New Freedom. Princeton, N.J.: Princeton University Press, 1956. Part of a series on Wilson, this work is the best on Wilson’s “New Freedom” progressive reforms. Detailed section on the development of the Clayton and Federal Trade Commission bills in Congress, along with Wilson’s role with them. McCraw, Thomas. Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn. Cambridge, Mass.: Harvard University Press, 1984. An excellent study of business-government relations in U.S. history. Uses the efforts of these prominent individuals to assess the success and failure of regulation. Focuses more upon Brandeis and the development of the FTC than on the Clayton Antitrust Act, although it contains a good analysis of the problems of the Clayton Act. Very readable. Peritz, Rudolph J., Jr. Competition Policy in America, 1888-1992: History, Rhetoric, Law. New York: Oxford University Press, 1996. History of federal government policies relating to antitrust issues. Includes a substantial bibliography and index. Thorelli, Hans B. The Federal Antitrust Policy: Origination of an American Tradition. Baltimore: Johns Hopkins University Press, 1955. A comprehensive and in-depth treatment of antitrust policy in U.S. history. Covers economic, social, and political formation of the antitrust movement in the legislative, executive, and judicial branches of government in the late nineteenth and early twentieth centuries. For those seeking a highly sophisticated and detailed treatment of U.S. antitrust policy. Bruce Andre Beaubouef Cross-References Champion v. Ames Upholds Federal Powers to Regulate Commerce (1903); The Supreme Court Decides to Break Up Standard Oil (1911); The 108

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Celler-Kefauver Act Amends Antitrust Legislation (1950); Carter Signs the Airline Deregulation Act (1978); Congress Deregulates Banks and Savings and Loans (1980-82); AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement (1982); Federal Court Rules That Microsoft Should Be Split into Two Companies (2000).

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LABOR UNIONS WIN EXEMPTION FROM ANTITRUST LAWS Labor Unions Win Exempt ion from Antitrust Laws

Category of event: Labor Time: October 15, 1914 Locale: Washington, D.C. Provisions of the Clayton Antitrust Act sought to exempt unions from prosecutions under the Sherman Antitrust Act of 1890 and under the Clayton Act itself Principal personages: Woodrow Wilson (1856-1924), a Democratic reform president who supported the Clayton Act Louis D. Brandeis (1856-1941), a controversial reform lawyer and Supreme Court justice Harry Daugherty (1860-1941), a conservative U.S. attorney general who favored antilabor injunctions Samuel Gompers (1850-1924), the leader of the American Federation of Labor Summary of Event Labor reforms embodied in provisions of the Clayton Act of 1914 had been decades in coming to realization. American labor legislation in the mid-nineteenth century had been as advanced in some regards as any in the world. The famed decision of the Massachusetts Supreme Court in Commonwealth v. Hunt in 1842 exemplified wide public acknowledgment that efforts by labor combinations to raise wages did not constitute a “conspiracy” and that laborers were justified in striking to win a closed, or all-union, shop. Half a century later, however, this tolerance of labor’s right to 110

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organize in its own self-interest had altered drastically in the public mind and therefore had changed the character and interpretations of labor legislation. The unprecedented industrialization of the United States and the attendant political ascendancy of the business classes were reflected in judicial decisions relevant to labor organizations and their methods. By the 1880’s, the nation’s courts were stipulating that labor’s right to combine and to strike were subject to serious legal restrictions. The judiciary’s antilabor bias was attributable in part to the violence that had marked labor protests, notably in an 1877 national railroad strike and in the Haymarket Square bombing in 1886. The judiciary’s hostility to many of the tactics associated with the growing labor movement was explained only in part as a reaction to labor violence. More basically, judges’ antilabor decisions mirrored fresh interpretations about the nature of property and the presumptive rights of business. That is, during the last quarter of the nineteenth century, the right to do business became a “property.” However troublesome they were, strikes against employers’ physical properties usually could he dealt with by police, by troops, or through criminal law. Labor’s picketing and boycotts, however, disrupted employers’ claimed right to have access to their markets. Beginning in the 1880’s, this perspective brought court injunctions into play as a preferred weapon of business against labor. Injunctions first won general public attention in 1894, when they were issued under provisions of the Sherman Antitrust Act of 1890 against labor organizer Eugene Debs. Injunctions were one cause of labor’s cries for national legislative reform. What turned such cries into screams were injunctions with provisions that led to the assessment of damages against unions resulting from boycotts that prevented employers from doing business. The U.S. Supreme Court’s decision in the Danbury Hatters’case in 1908 (Loewe v. Lawlor) not only gave specificity to this menace to labor but also, by subjecting labor organizations and their members to damages under antitrust law, threatened trade unions with extinction. Labor’s salvation, if there were to be any, appeared in 1913 with the inauguration of President Woodrow Wilson. Wilson, taking a positive view of his office under the banner of his New Freedom, sponsored or supported a whirlwind of reform legislation. These measures affected tariffs, banking, the hours and conditions of labor, the protection of seamen, income taxation, popular election of U.S. senators, aid to agriculture, and, by way of strengthening the Sherman Act, the regulation of business trusts. It was from this latter step toward improved trust regulation that the Clayton Act emerged. 111

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Three bills that had been drafted by the chairman of the House Judiciary Committee, Henry D. Clayton (D-Alabama), were subsequently combined into one. In its original form, the bill left the proclaimed needs of labor unaddressed. Primarily, the bill sought to abolish the trusts’ characteristic unfair trade practices, including price discrimination, tying contracts, and interlocking directorates and stockholdings.

Eugene Debs, seen here speaking at a labor convention, was imprisoned in 1894 for his activities during a railway workers strike. (Library of Congress)

The bill was assailed immediately by representatives of big business, but the most vociferous of its critics were representatives of organized labor, led by a founder and the president of the American Federation of Labor (AFL), Samuel Gompers. Anticipating Wilsonian reform, Gompers had broken AFL tradition by throwing the group’s political support behind Wilson’s election campaign. Nothing in the initial Clayton bill removed labor from the purview of Sherman Act antitrust injunctions and prosecutions. Vowing that he would lead the AFL into Republican arms against Wilson’s antitrust reforms, Gompers declared publicly that “without further delay the citizens of the United States must decide whether they wish to outlaw organized labor.” President Wilson remained adamant, but pressure from Gompers produced a congressional compromise. It was engineered by North Carolina’s 112

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Representative E. Y. Webb, who believed, as did many others, that the Sherman Act was never intended to apply to labor unions. The compromise therefore incorporated labor provisions in a bill otherwise aimed at eliminating restraint-of-trade strategies employed by trusts. Affirmed by an overwhelmingly favorable vote, the Clayton bill cleared the House of Representatives on June 5, 1914. After its Senate passage, it was signed into law on October 15, 1914. Because of the Clayton Act’s sections 6 and 20, Gompers instantly hailed it as providing basic but important rights. On its face, the act appeared to confirm this appraisal. Section 6 asserted that human labor was neither a commodity nor an article of commerce and further declared that nothing in federal antitrust laws forbade the existence of labor and agricultural unions or their lawful activities. Section 20 prohibited federal courts from issuing injunctions in labor disputes, except when irreparable damage to property might result and when there was no legal remedy for the dispute. More specifically, section 20 forbade federal injunctions prohibiting the encouragement of strikes, primary boycotts, peaceful assembly, and any other labor activities that were lawful otherwise under federal statutes. Impact of Event With passage of the Clayton Act, organized labor had its day in Congress, but it had not had its day in the nation’s judicial system. Outside labor circles, many experts agreed that the act in no sense gave labor organizations immunity from antitrust prosecution. Evidence indicates that Wilson himself opposed such exemption. Sharp critics of the act’s provisions further noted that the original bill had been so diluted in debate that its final version was an anemic sop to labor. As swift and brilliant as President Wilson’s reform legislation had been, its momentum was halted by America’s preparation for and participation in World War I. At war’s end, the public soon wearied of ideological and partisan battles over Wilson’s foreign policy and became disillusioned with reformist exuberance. The 1920’s witnessed a revival and strengthening of traditional conservative probusiness politics. Taking advantage of the nation’s postwar lassitude, fears generated by violence attending postwar strikes, and antipathy toward Communists, who were said to be leaders of the labor movement, employers again went on the offensive against labor. They created thousands of company-sponsored unions and again resorted to hiring armed company guards and strikebreakers. Capitalizing on antilabor sentiments, employers drew upon local and state authorities to deploy police and troops to harass and arrest union organizers. Yellow dog contracts (threatening workers with dismissal 113

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should they join a union) became commonplace and, chiefly under the auspices of the National Association of Manufacturers, antilabor propaganda was circulated widely and systematically in favor of open shops, which allow nonunion workers to be employed even though a union may have organized the workplace. The fabric of protective legislation that Gompers and his fellow labor leaders presumed to be embodied in the Clayton Act’s labor provisions was shredded by a U.S. Supreme Court decision in 1921. This seminal case was Duplex Printing Press Company v. Deering. It represented the Court’s interpretation of the Sherman and Clayton acts as protecting employers from labor violence, from secondary boycotts, and from the use of other labor tactics that could be construed as unlawful interference with interstate commerce. The Duplex case involved attempts by a Michigan union in 1919 to organize the Duplex Company, one of only four such companies manufacturing printing presses and the only one remaining unorganized. To this end, the Michigan union persuaded workers and their employers in New York to boycott Duplex products; that is, to impose a secondary boycott. Speaking for a conservative Court, Justice Mahlon Pitney held that certain union tactics constituted unlawful interference with interstate commerce and therefore were subject to antitrust laws. Secondary boycotts fell under antitrust laws as restraints of interstate trade and conspiracies. Section 6 of the Clayton Act, Pitney asserted, protected unions solely in regard to their lawful pursuit of legitimate objectives. Since in the Court’s view secondary boycotts were unlawful, unions that instituted them were deprived of protection by the Clayton Act. The act’s provisions in section 20 shielded unions from the issuance of injunctions against them, but injunctions were prohibited, Pitney noted, only in regard to the employees of an offending employer, the immediate parties to a labor dispute. The act thus did not prohibit an injunction against the New York workers and employers secondarily involved in the dispute. By holding unions accountable under antitrust laws for anything the Court deemed to be other than normal and legitimate union activity, the Court effectively nullified the Clayton Act’s labor provisions. As experts observed, the only remaining union actions that fell under protection of the Clayton Act were those considered lawful before passage of the act. This narrow judicial interpretation of sections 6 and 20 effectively negated the intent of a reform Congress and made it almost impossible for unions to organize workers in nonunion companies. It scarcely mattered in the short run that Supreme Court Justice Louis D. Brandeis, one of the architects of Wilson’s New Freedom, defended labor’s right to push its struggle to the limits of its self-interest through encouraging 114

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sympathetic strikes. Employers benefited from judicial protection, a fact seemingly confirmed in a 1922 decision that confirmed the possibility of prosecution of unions as trusts. That same year, U.S. Attorney General Harry Daugherty invoked a wholesale issuance of court injunctions, nearly three hundred of them, against striking railway workers. Final hearings on these injunctions were repeatedly postponed until union battles against employers had failed. The wide latitude allowed to courts by the Duplex decision meant not only a denial of jury trials but the use of injunctions against payment of strike benefits and even against the public’s feeding of strikers’ families. Relief from what labor and most liberals regarded as the blatant injustices of a probusiness and ultraconservative decade seemed possible by the end of the 1920’s. In 1928, the planks of both major political parties featured anti-injunction proposals. The public pressures that resulted in enactment of the prolabor Norris-LaGuardia Act in 1932 and passage of the seminal National Labor Relations Act (Wagner Act) three years later were mounting. The New Deal administrations of Franklin D. Roosevelt ushered in an era rich in labor reform. Bibliography Babson, Steve. The Unfinished Struggle: Turning Points in American Labor, 1877-Present. Lanham, Md.: Rowman & Littlefield, 1999. Brooks, Thomas R. Toil and Trouble: A History of American Labor. 2d ed. New York: Delacorte Press, 1971. A colorful and not uncritical prolabor account. Solid and informative. Chapters 11 and 12 are especially relevant. Greene, Julie. Pure and Simple Politics: The American Federation of Labor and Political Activism, 1881-1917. New York: Cambridge University Press, 1998. Gregory, Charles O. Labor and the Law. New York: W. W. Norton & Company, 1946. A law professor’s pithy and straightforward account. Excellent on labor, injunctions, and antitrust problems in chapters 7 and 8. Includes a list of cases. Link, Arthur S. Woodrow Wilson and the Progressive Era, 1910-1917. New York: Harper & Brothers, 1954. Authoritative survey by the leading Wilson scholar. Reads easily. Chapter 3 is excellent on Wilson, Congress, labor, and the Clayton Act. A fine introduction to the topic. Northrup, Herbert R., and Gordon F. Bloom. Government and Labor. Homewood, Ill.: Richard D. Irwin, 1963. Authoritative, detailed, and clear reading. Balanced and outstanding. Includes a table of cases. Taft, Philip. The A. F. of L. in the Time of Gompers. New York: Harper & 115

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Brothers, 1957. Dry, dense narrative, but an authoritative study. Invaluable for Gompers’ views on and politics involving the Sherman and Clayton acts and injunctions. Wilcox, Clair. Public Policies Toward Business. 3d ed. Homewood, Ill.: Richard D. Irwin, 1966. Splendid analysis of the subject. Balances the interests and motives of government, business, and labor in regard to antitrust regulations. Chapters 1 through 5 are pertinent. Table of cases. Clifton K. Yearley Cross-References The Federal Trade Commission Is Organized (1914); Congress Passes the Clayton Antitrust Act (1914); The Norris-LaGuardia Act Adds Strength to Labor Organizations (1932); The Wagner Act Promotes Union Organization (1935); Roosevelt Signs the Fair Labor Standards Act (1938); The Celler-Kefauver Act Amends Antitrust Legislation (1950).

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THE UNITED STATES ESTABLISHES A PERMANENT TARIFF COMMISSION The United States Establishes a Permanent Tariff Commission

Category of event: International business and commerce Time: September 8, 1916 Locale: Washington, D.C. Seeking to restructure and reform America’s tariffs along “scientific” lines, the administration of President Woodrow Wilson created the Federal Tariff Commission Principal personages: Woodrow Wilson (1856-1924), the president of the United States, 1913-1921 Frank William Taussig (1859-1940), an economist, tariff expert, and proponent of moderate tariffs Oscar Wilder Underwood (1862-1929), a tariff reformer and congressional leader Theodore Roosevelt (1858-1919), the president who originally proposed a permanent tariff commission Robert John Walker (1801-1869), a treasury secretary who laid the basis for tariffs as a source of revenue Summary of Event Establishment of the independent Federal Tariff Commission in 1916 represented a turning point in reformers’ half-century struggle against the politics of protectionism. Tariffs are schedules of duties levied by government fiat upon imports, and sometimes on exports. Since 1789 and the 117

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levying of the first such American duties, tariffs had been the subject of debate and often of passionate controversy. Debates concerned the levels of tariffs and their uses, such as promoting free trade; protecting and subsidizing “infant industries” (those in the process of development and therefore unable to compete in international markets), sectional interests, and politically powerful farmers and manufacturers; providing a source of federal revenues; and acting as weapons of trade policy and foreign policy. Such questions have surrounded the tariff issue in many local elections and in nearly every presidential campaign from the founding of the United States into the 1990’s. In pre-Civil War years, while Southern and Western agricultural interests held sway in Washington, the tendency of the Democratic administrations representing them to maintain low tariffs became an article of faith. With the ascendance of Northern and Western Republicanism from the 1860’s to the early 1900’s, and again in the 1920’s, the political allegiance of the dominant party shifted to protectionism and high tariffs. Reform impulses of the Progressive Era emerged during a fifty-year period of high, at times exclusionary, Republican-made tariffs. Rarely did political pronouncements of the dominant Republicans discuss the virtues of liberalizing foreign trade. The momentum of reform, which cut across party lines, did encompass tariff rates. Convictions about tariff issues thus became a simplistic touchstone of whether individuals were identified as conservative champions of economic privilege or were marked as liberals eager to relieve consumers of tariff-raised prices and to restore a competitive marketplace. Without publicly abandoning their support of high tariffs, Republican administrations beginning early in the 1880’s nevertheless negotiated a series of short-term reciprocal trade treaties that in principle modified their protectionism. Even a paragon of Republican conservatism such as President William McKinley had concluded privately by 1897 that, as the world’s major industrial power, the United States had outgrown the need to isolate and safeguard its economy behind high tariff walls. America’s productivity and attendant surpluses of goods, its new international interests, its growing imperial commitments, and its increasingly restive antitariff forces all indicated that prosperity was no longer tied exclusively to the domestic market. Consequently, under McKinley’s presidential successor, Theodore Roosevelt, there were signs of tariff moderation and of lowered rates, including passage of the Payne-Aldrich Tariff of 1909. President Woodrow Wilson, an eloquent advocate of reforms and a learned exponent of “positive government,” engineered or supported the largest packet of American reform legislation in history, most of it during his first term in office. Tariff reform was ranked foremost on his legislative 118

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agenda and proved in 1913 to be the earliest of his political tests before Congress. Wilson chose the Underwood bill, vetoed by his predecessor, William Howard Taft, as the vehicle to affirm his commitment to making American business and agriculture genuinely competitive through a restructuring of tariffs. After his inauguration, Wilson consulted with the bill’s author, Oscar Wilder Underwood, an Alabama Democrat who chaired the House of Representatives’ powerful Ways and Means Committee. The bill stung hordes of lobbyists into action and was debated hotly. Wilson’s personal appearance before Congress to urge its passage was almost unprecedented and constituted a daring gamble with his party stature and his executive authority. Successfully enacted in 1913, the Underwood Tariff was described appropriately as the most revolutionary tariff reduction and revision in more than half a century, matched only by Treasury Secretary Robert John Walker’s classic enunciation in 1846 of principles of low tariffs, to be used only for revenue and not for protectionism. The Underwood Tariff specifically invested wide discretionary authority in the secretary of the treasury to examine the books of importers suspected of dishonesty, to strengthen the power of collectors, and to improve the assemblage of accurate trade and tariff statistics. These were all subtle extensions of federal authority. Of more lasting significance, the Underwood Tariff carried provisions for an income tax to compensate for the $100 million in revenues expected to be lost from tariff reduction, a tax soon institutionalized by the Sixteenth Amendment to the Constitution. The Federal Tariff Commission, created in 1916 as one of the first independent federal agencies, was designed as a keystone to this lengthy and often tortuous process of tariff reform. The immediate aims of the commission were to winnow the morass of often-unreliable information on which previous tariffs had been based and to collect accurate data that would inform the structuring of “scientific” tariffs. The Wilson Administration hoped to depoliticize the tariff-setting process, removing it from insidious lobbying and favoritism that generally had marred it in the past. It was hoped that future Congresses and presidents could be informed by the unbiased advice of experts. The six members of the commission, among them the distinguished Harvard economist and tariff historian Frank William Taussig, were presidential appointees. Members were three from each party, serving six-year terms upon their Senate confirmations. Neither political party was enthused about establishing the commission. Wilson’s demonstration of his presidential authority alone carried it into being. Wilson was clear about wanting to depoliticize the process of setting tariffs, about eliminating the special privileges masked behind earlier tar119

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iffs, and about listening to the complaints of small businesses and reformers. Wilson was not an unbridled advocate of free trade. He described himself as a “rational protectionist” and had insisted in campaign speeches on “a competitive tariff,” a position close in practice to the Republican call for tariffs designed to equalize domestic costs of production with the costs of imported goods. The fate of the commission and the services it might be called upon to perform depended on presidential perceptions about the objectives to be sought in the formulation of national policies. Impact of Event Tariff experts and economists such as Taussig were aware of the inherent limitations imposed upon the Federal Tariff Commission at its inception. They saw as illusory the hope among reformers that the commission could help the enactment of scientific tariffs. As Taussig wrote dismissively in this connection, “there are no scientific laws applicable to economic problems.” Later, Nobel Prize-winning economist Paul Samuelson described pleas for a scientific tariff as “the most vicious” argument for a tariff, one that for generations had ignorantly informed federal policy and reflected adversely upon the “economic literacy” of the American people. Many of the justifications advanced by Wilson and other Progressives in the battle to establish a tariff commission were fallacious. Reformers hoped to make the tariff scientific by making it “competitive,” and Republican conservatives insisted on a tariff that “equalized the costs of production at home and abroad.” In practice, these were nearly identical positions. The unsoundness of them rests on the fact that trade is based on differences in costs and advantages among individuals and nations. Contrary to this, a so-called “scientific tariff” gave sanction to the prejudices that all industries were equally worth having; that when cost differences between nations grew, duties accordingly should rise; and that every industry, regardless of the quality of its products and its adaptation to America’s natural resources, should enjoy the equalizing protection of the tariff. The fallacious reasoning was part of politics and not of economics, but its prevalence highlighted the political limitations that weighed on the Federal Tariff Commission. The commission was an administrative agency and as such was incapable of significantly influencing national policymaking. Moreover, as friendly observers of the commission noted during its first years of operation, even if it were to be charged with preparing a tariff or elaborating a tariff bill, it was ill-equipped to do so. The experience of the Tariff Commission of 1882 and the Tariff Board of 1910 (both temporary organizations) indicated that the time required for requisite investigations of costs and conditions at home and abroad, as well as for 120

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reviews and the actual formulation of tariff schedules, would prove much too lengthy for such work to be of service to Congress. Exactly how contingent the work of the Federal Tariff Commission was upon the varying degrees of enlightenment that characterized national politics was manifested by a renascence from 1921 to 1934 of high protectionism. Wilson’s Emergency Tariff (1921) raised import levies on most agricultural products and reversed the pronounced downward trend of the Underwood Tariff. This reversal was followed swiftly by the FordneyMcCumber Tariff in 1922, which elevated levies imposed on manufactured imports and farm products substantially above the Payne-Aldrich levels of 1909. Presidential selection of tariff commission members, moreover, ran to the mediocre. Then, in the midst of economic crisis at the onset of the Great Depression and against the advice of more than a thousand economists, the administration of President Herbert Hoover enacted the SmootHawley Tariff in 1930, imposing the highest protective tariffs in the nation’s history. Tariff commissioners could draw some comfort from changes in the law that allowed presidents, after receiving the commission’s recommendations, to alter individual tariff rates by half of those set by Congress. When President Franklin D. Roosevelt’s first New Deal administration shifted from economic isolationism to the initiation of long-term tariff reductions by means of reciprocal trade agreements in 1934, vitality was infused into the commission’s functions by the perceived mandates of a new trade era. After 1934, and continuing almost unabated into the 1990’s, protectionism was repudiated as national policy. That change was reflected in the Federal Tariff Commission’s redesignation in 1974 as the U.S. International Trade Commission (ITC). The ITC, in conjunction with advising presidents, Congress, and other governmental agencies on a wide array of trade and tariff questions, has exercised important investigatory and reporting functions in regard to the fiscal and industrial effects of American customs laws. These encompass relationships between duties on raw materials and finished products, the impact of customs laws on national revenues as well as upon industry and labor, the trade and tariff relations between the United States and other countries, economic alliances, commercial treaties, multilateral trade negotiations, and the effects of foreign competition with American industries. Its data analysts monitor the impacts of hundreds of categories of imports on the domestic economy. As always, the utility and effectiveness of such agencies remained determined by the nation’s political course. Bibliography Leech, Margaret. In the Days of McKinley. New York: Harper & Brothers, 1959. McKinley’s career was closely identified with protectionism. 121

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Insightful on changes in his views. Fine background to an understanding of why reformers wanted a permanent commission. Chapters 2 and 6 are especially relevant. Link, Arthur S. Woodrow Wilson and the Progressive Era, 1910-1917. New York: Harper & Brothers, 1954. Authoritative synthesis by the leading Wilson scholar. Excellent on tariff issues and the commission. Photos, ample footnotes, essay on sources, excellent index. Invaluable for context and specifics. Lyon, Leverett S., and Victor Abramson. Government and Economic Life. Vol. 2. Washington, D.C.: The Brookings Institution, 1940. Authoritative and easy to read. Chapter 20 is a superb summary of tariff history and the tariff commission. Updates and condenses Taussig’s works. Taussig, Frank W. Free Trade, the Tariff, and Reciprocity. New York: Macmillan, 1920. Taussig remains the chief authority on tariff history through 1930. His work is clear, is easy to read, and reflects his interactions with working government as well as his academic specialization. Chapters 5, 6, 9, and 10 are especially relevant. ______. The Tariff History of the United States. 1892. Reprint. New York: A. M. Kelley, 1967. Still an essential, authoritative, easy-to-read survey. Chapters 8 through 11 are relevant on the commission’s evolution and functions. Few notes and no bibliography, but a useful index. Clifton K. Yearley Cross-References The Panama Canal Opens (1914); The General Agreement on Tariffs and Trade Is Signed (1947); Eisenhower Begins the Food for Peace Program (1954); The North American Free Trade Agreement Goes into Effect (1994).

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STATION KDKA INTRODUCES COMMERCIAL RADIO BROADCASTING Station KD KA Introduces Commercial Radio Broadcasting

Categories of event: New products and advertising Time: November 2, 1920 Locale: Pittsburgh, Pennsylvania The first commercial radio broadcast demonstrated radio broadcasting’s potential both as a source of communication and as a source of advertising revenue Principal personages: David Sarnoff (1891-1971), a young wireless operator for American Marconi, later president of RCA William S. Paley (1901-1990), the owner of CBS Frank Conrad (1874-1941), an amateur radio station operator and engineer with Westinghouse Guglielmo Marconi (1874-1937), the inventor who first popularized wireless communication Reginald Fessenden (1866-1932), an inventor who presented the first known voice broadcast Owen D. Young (1874-1962), the board chair of GE and RCA Summary of Event On November 2, 1920, station KDKA of Pittsburgh, Pennsylvania, broadcast the results of the Warren G. Harding-James Cox presidential election. This presentation is generally considered to be the first commercial radio broadcast. Although the event is more a milestone than an 123

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indication of innovation, it was the demonstration that finally pushed the wireless industry into the realm of big business. The KDKA broadcast was the culmination of efforts begun in the late nineteenth century. The idea of wireless communication began to take shape in 1873, when physicist James Clerk Maxwell theorized the existence of electromagnetic waves. Maxwell’s theory was proven by Heinrich Hertz, and a young Italian inventor, Guglielmo Marconi, experimented with and improved upon the ideas of Hertz. Others would make contributions, including Reginald Fessenden, who arranged what many refer to as the first public broadcast. On Christmas Eve, 1906, Fessenden successfully broadcast music and voice messages to ships at sea. This was the first time that wireless communication had been used for anything other than Morse code or coded messages. In its early development, wireless communication was a fairly specialized endeavor. Initially it was used only when existing telephone and telegraph applications were impossible, as in ship-to-shore communications. It was of particular interest to private shippers and to the military. Controversies over patent rights and alleged infringements threatened to strangle the development of wireless communication. World War I pushed the development forward. When the United States entered the war, the Navy took control of wireless operations, suspending amateur licenses and controlling key facilities. It also called for a moratorium on patent suits, asking all manufacturers to pool their resources for the war effort. The resulting cooperation not only sped up the development of wireless communication but also served as a precedent for cooperation in the 1920’s. After the war, reprivatization meant that once again competing companies each held important pieces of the radio puzzle. After complex negotiations, General Electric (GE), the Radio Corporation of America (RCA), American Telephone and Telegraph Company (AT&T), and Westinghouse signed a patent-pooling agreement on July 1, 1920. This agreement seemed to make good economic sense to all the new partners. GE and Westinghouse would manufacture radio receivers, which would be sold by RCA. AT&T would manufacture transmitters and would also hold the rights to “radio telephony” operations. RCA, because it was jointly owned by GE, Westinghouse, and AT&T, became the common ground for the pooling of information and cooperation. The agreement was effective only for a short time, in large part because it had not taken into account a new use for radio telephony, that of radio broadcasting. The evolution of station KDKA is a good example of the swift changes in the industry. KDKA began as an amateur experimental station (8XK) licensed to Frank Conrad, a Westinghouse engineer. Shortly after World 124

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War I, Conrad resumed his private broadcasts. On October 17, 1919, he became an instant celebrity when he placed his microphone in front of a phonographic machine to broadcast prerecorded sound. Conrad’s broadcasts proved so popular that a Pittsburgh department store began selling amateur receivers designed to pick up Conrad’s signal. This activity caught the attention of Westinghouse vice president H. P. Davis, who suggested to Westinghouse executives that the company could both boost sales of its receivers and promote its own name by building its own station. In October of 1920, the company filed an application. Its station KDKA became the first governmentally licensed radio station. On November 2, the station inaugurated its broadcasting with the results of the presidential election. Impact of Event Although station KDKA broadcast a number of program types later to become standard radio fare, it did not run commercials or paid advertisements. Its owner, Westinghouse, financed the operation as a means of selling its own products. RCA and GE also began to fund broadcasting facilities, each with the purpose of encouraging the sale of radio receivers. A different philosophy was expressed by AT&T, which started station WEAF in New York City in 1922. AT&T planned to lease its broadcasting facility, just as it leased its long-distance telephone wires, charging a “toll” for advertising. Although the WEAF experiment was not an immediate success, the concept would ultimately prove to be the answer to a question that had baffled broadcasters for years, that of how broadcasting could pay its own way. It would also be the catalyst for renewed conflict in the industry. In 1926, a new set of agreements was reached that effectively redefined radio broadcasting. AT&T maintained a monopoly on providing connections between stations (forming “networks”) and in return sold WEAF and agreed not to buy any other station for at least eight years. RCA, with newly purchased WEAF as its flagship station, formed a new subsidiary to oversee its network operations. This new enterprise, the National Broadcasting Company (NBC), became the first company organized solely to operate a network. Some two dozen stations, most of them independently owned, carried NBC’s first network program on November 15, 1926. This set of stations became the basis of NBC’s “Red Network.” RCA’s station WJZ in New York City served as the anchor for NBC’s second group of stations, the “Blue Network.” By operating two networks, NBC controlled two stations in most major markets, creating a formidable economic enterprise. The Columbia Broadcasting System (CBS) emerged from the merger of 125

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the United Independent Broadcasters and the Columbia Phonograph Corporation. The Columbia Phonographic Broadcasting System began in 1927 but would struggle until controlling interest was purchased by William S. Paley, then an executive with the Congress Cigar Company. Under Paley’s leadership, CBS expanded from seventeen affiliates in 1928 to ninety-one affiliates in 1933. Although all three networks were still heavily dependent on their owned and operated stations for income, by 1933 the basis for modern network practices was in place. The first commercial radio broadcast by KDKA, followed in 1922 by the airing of the first paid radio advertisement on WEAF, demonstrated the potential of radio broadcasting both as a communication source and as a vehicle for economic gain. Once the “toll broadcasting” idea took root, a new mass medium was created. An important element in the development of radio broadcasting, one that differentiated the United States from other countries, was that broadcasting was essentially privately owned and commercially supported. Initially, stations were built by manufacturers as a means of selling radio receivers. Other stations were started as publicity gimmicks, or even on a whim. In the early 1920’s, most stations expected to reap indirect values such as future sales or good will rather than direct revenues. By the late 1920’s, however, the need for increased power, better equipment, and more sophisticated programming (in order to attract and maintain an audience) meant that radio could no longer be supported as a “hobby.” Station owners began to look for ways to make radio pay its own way. To this end, the “toll experiment” of WEAF was closely monitored. In the late 1920’s, radio stations still did not have the production and programming skills necessary to meet the increasing demand for entertainment. Filling this void, advertising agencies began to take over part of the programming role, expanding the notion of program sponsorship. During the “Golden Age” of network radio in the 1930’s and early 1940’s, most major entertainment programs were produced by advertising agencies for their clients. The agencies sometimes charged the usual 15 percent commission rate both to the station and to their clients. Network radio would literally change the way advertising was bought and sold. For the first time, radio advertisers were able to send their messages to every part of the country via one purchase. By the end of World War II, networks accounted for the vast majority of the radio audience. Radio was one of the few industries to survive, and even grow, during the Depression. Unlike other media, radio was free to its audience. The periodic interruption of programming for commercials was a small price to pay for a populace desperate for any sort of escape from daily reality. 126

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Advertising revenues increased dramatically after the advent of networks. In 1926, the estimated total sale of commercial time was $200,000. This rose to $4,820,000 in 1927, the first complete year of network operations. Revenues almost tripled in 1928, then almost doubled again in 1929, to $26.8 million. By the end of the decade, radio had clearly proved itself as an effective advertising medium. The KDKA broadcast demonstrated that commercial broadcasting was possible, and the WEAF experiment in “toll” broadcasting identified a means of economic survival. The formation of radio networks created the first real opportunity for national advertising, an opportunity that would forever change the way goods and services were marketed. Bibliography Barnouw, Erik. A Tower in Babel: To 1933. Vol. 1. In A History of Broadcasting in the United States. New York: Oxford University Press, 1966. A detailed chronology of the history of broadcasting. Emphasizes the important individuals and their contributions. Later volumes continue the research. An important work. Douglas, George H. The Early Days of Radio Broadcasting. Jefferson, N.C.: McFarland, 1987. An informal history of the early years of radio broadcasting, paying particular attention to the 1920’s. Focuses on political, financial, manufacturing, and entertainment developments. Godfrey, Donald G., and Frederic A. Leigh, eds. Historical Dictionary of American Radio. Westport, Conn.: Greenwood Press, 1998. Encyclopedic reference work on broadcasting history, with extensive bibliography and index. Head, Sydney W., and Christopher H. Sterling. Broadcasting in America: A Survey of Electronic Media. Boston: Houghton Mifflin, 1987. A detailed and analytical look at the electronic media. An excellent resource, one of the most popular textbooks in the field. Keith, Michael C., and Joseph M. Krause. The Radio Station. Boston: Focal Press, 1986. Combines an overview of the history of radio broadcasting with detailed explanations of commercial station operations. Useful primarily as a means of understanding how a contemporary station works. Sterling, Christopher H., and John M. Kittross. Stay Tuned: A Concise History of American Broadcasting. Belmont, Calif.: Wadsworth, 1978. A good overview of radio and television, organized both chronologically and by topic. Does an effective job of blending events with explanations of their significance. A popular textbook. Summers, Robert E., and Harrison B. Summers. Broadcasting and the 127

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Public. Belmont, Calif.: Wadsworth, 1966. Looks at the history of broadcasting both as a social force and as a business. A useful background source. William J. Wallace Cross-References The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Congress Establishes the Federal Communications Commission (1934); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); The U.S. Government Bans Cigarette Ads on Broadcast Media (1970); Cable Television Rises to Challenge Network Television (mid-1990’s).

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THE A. C. NIELSEN COMPANY PIONEERS IN MARKETING AND MEDIA RESEARCH The A. C. Nielsen Company Pioneers in Marketing and MediaResearch

Category of event: Marketing Time: 1923 Locale: The United States Pioneering in market research, the A. C. Nielsen Company became a leader in the field, having significant technical and financial effects on commerce, advertising, and media research worldwide Principal personages: A. C. Nielsen, Sr. (1897-1980), the company founder A. C. Nielsen, Jr. (1919), the successor to A. C. Nielsen, Sr., and company president, 1957-1959 John C. Holt (1940), the chairman and chief executive officer of the company beginning in 1987 Serge Orkun, the president of the company in 1993 John Dimling (1938), the president and chief executive officer of Nielsen Media Research in 1993 Anne Elliot (1953), the director of communications for Nielsen Media Research in 1993 Summary of Event The A. C. Nielsen Company was founded by A. C. Nielsen, Sr., in 1923 as a firm of engineering consultants who measured product movement and market size for industrial machinery and equipment. By 1933, this service had been abandoned and replaced by a marketing information service 129

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known as the Nielsen Drug Index. This service used a standing panel of drug stores to measure sales of products distributed through retail drug stores and attempted to identify factors that influenced sales. Seven months later, Nielsen established a similar service for the food industry known as the Retail Index Services. With the establishment of these services, Nielsen grew to be the leading market research company in the world. In 1984, the company merged with the Dun and Bradstreet Corporation. As of 1993, the A. C. Nielsen Company was divided into two separate business units: Nielsen Marketing Research and Nielsen Media Research. By the early 1960’s, many United States companies had begun to expand their operations abroad. In 1959, A. C. Nielsen, Jr., then president of the company, explained the research approach to marketing and set down a number of guidelines to successful marketing, particularly overseas. He stressed adapting the product to the market, gauging the impact of customs and traditions of prospective consumers, studying differences in advertising, identifying the product with the local scene, knowing the trade channels, and understanding the consumers’ views of price and quality. The Nielsen name is best known to the general public for the television rating system established by Nielsen Media Research. Radio audience research began in 1936 as a service to advertisers, advertising agencies, and radio station business managers who looked to the medium as a means of selling products. The idea was to identify links between what people listened to and what products they were buying or were likely to buy. The company used a device known as the Audimeter, which was attached to a radio and connected to a moving roll of paper. The machine created a permanent record of the stations tuned in by a sample population of about one thousand consumers. This replaced the slower and less accurate method of telephone surveys of what people were listening to at a given time. During the 1950’s, Nielsen began measuring and indexing the audiences of network and local television stations and assigning ratings points according to how many people in a sample audience were watching a given program at a given time. To select a sample of four thousand households with television sets, Nielsen used the U.S. Census Bureau’s decennial census counts of all housing units in the country and randomly selected about five thousand blocks in urban areas and correspondingly small geographical units in rural areas, then selected one household from each. Field researchers then collected data on the demographics of households and individual information on persons in each home. At first, Nielsen relied on telephone surveys and diary reports as audience indicators, but later the company developed mechanized means of data collection and reporting. Even this relatively small sample of households was statistically reliable. 130

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Each Nielsen household represented thousands of American homes. Nielsen used the sample results to project ratings for the entire American television audience. If fifteen percent of the sample watched a particular show, Nielsen would award it fifteen ratings points. By 1964, Nielsen had discontinued its radio audience measurement to concentrate entirely on television viewership. By the late 1980’s, the techniques of measuring the audience, collecting and computing data, and reporting to marketers, advertisers, and programmers who used the information had been streamlined and computerized. Television ratings could be reported overnight. Nielsen used the People Meter, a device developed by AGB Research in the United Kingdom. People in the sample households recorded which channel they were watching by pushing buttons on the machine. The meter recorded which channel was being watched, by whom, and for how long. The machine removed some of the unreliability of diary reports. By 1987, Nielsen was relying solely on the People Meter to produce national television program ratings. Supplementary information on individual viewership was provided by weekly diaries kept by individual household members. Data collection, computation and reporting, and technological engineering took place in an operations facility in Dunedin, Florida. As of 1993, Nielsen provided five basic services to its customers: the Nielsen Television Index (NTI), tracking national network television audiences since 1950; the Nielsen Station Index (NSI), tracking local television audiences since 1954; the Nielsen Syndication Service (NSS), tracking audiences for syndicated programming since 1985; the Nielsen Home Video Index (NHI), tracking audiences for cable, videocassette recorders (VCRs), and other new television technologies using People Meters, set-tuning meters, and paper diaries since 1980; and Nielsen New Media Services, providing custom research and start-up service for measurement of nontraditional markets, such as Hispanic viewers, since 1992. In 1992, the company reached an agreement with Telemundo and Univision in order to launch a national Hispanic measuring service. Impact of Event Nielsen Marketing Research introduced and formalized the concept of products holding percentage shares of their market. This concept can be said to have brought the overlapping disciplines of advertising and marketing closer together. Nielsen tracked what stores were selling, and advertisers tracked what people were buying and how they made their purchase decisions. Nielsen’s quantitative statistics on product movement, its categorization of products moved, and its demographic statistics on buyers pro131

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vided valuable information to producers, marketers, and advertisers. In 1959, Nielsen Marketing Research was operating in eleven countries. By 1991, that figure had grown to twenty-seven, and the company reported worldwide revenues of $1.2 billion. By the early 1990’s, Nielsen Marketing Research had expanded its research on product sales and the demographics of consumers to Europe, Latin America, and the Pacific Rim. It counted among its customers not only advertising agencies but also local companies or foreign branches of United States companies producing and selling food, pharmaceuticals, cosmetics, and durable goods. Targeting the emerging free economies of Eastern Europe, Nielsen established offices in Hungary in 1991, with plans to expand to Poland and Czechoslovakia. For companies engaged in multinational trade and marketing, Nielsen provided an international database service, instructional software on market research methods, and statistics on product movement. Such well-known corporations as CheeseboroughPonds, Procter & Gamble, and Pillsbury relied heavily on Nielsen’s services and technology for the success of their operations. Giant advertising agencies including Saatchi & Saatchi and J. Walter Thompson also used Nielsen data. During the mid-1980’s, Nielsen Media Research’s rating system came under criticism by television programmers, writers, and producers as well as segments of the television audience. Audience choices for viewing and the percentage of the population owning television sets had multiplied since the 1950’s, when Nielsen began its television audience measurement. Advertisers relied on Nielsen’s statistics for their choices of which programs to sponsor, and programmers relied on the advertisers to finance the programs they decided to air. Critics of the rating system charged that reliance on ratings as the basis for programming choices had a negative impact on the quality of commercial television programs. New programs did not get a chance to prove themselves, and homogeneity became the rule. Nielsen answered these charges by pointing out that rating points are based on statistical estimates of how many people watch a show, not an opinion poll of what they think of it or an artistic criticism of its value. Nielsen emphasized that the quality of programming depended on how programmers and advertisers interpreted the statistics. As network television viewership continued to decrease, network executives were ready to admit that the increase in program choices made available by cable television and VCRs was part of the cause for their declining ratings. Questions arose, however, regarding whether the Nielsen rating system was giving an accurate picture of network viewership. Ratings had become the currency of negotiation between advertiser and the 132

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networks. Air time had become extremely expensive, and the cost of it was determined by the number of Nielsen rating points expected for the program during which an advertisement was aired. Networks sometimes were forced to give refunds because ratings were lower than anticipated. In the late 1980’s and early 1990’s, the television networks joined forces to commission a committee on nationwide television audience measurement (CONTAM). CONTAM was asked to investigate and report on the practicality and reliability of the People Meter, the way the viewing panel was recruited, and the accuracy of data on audience size at a given time. The People Meter had been indicating lower numbers of viewers for the networks and higher numbers for their competitors. CONTAM concluded from observations and field interviews that pressing the buttons of the People Meter became tedious and that members of the viewer panels did not always use the device. Therefore, there was no way of telling with certainty whether they were watching television at all, let alone watching a particular program at a certain time. Furthermore, telephone surveys of what people were watching at a certain time indicated that in many cases there were more people watching network television than had been indicated by the People Meter results because household members did not record themselves as watching or because household visitors were in front of the set. In regard to how the viewer panel was selected, the committee discovered that Nielsen divided candidates for the panels into “basics” and “alternates.” Basics, chosen because of the number of children in the household and the presence of cable television services, were the first people invited. If these people refused, alternates were chosen. CONTAM discovered a high rate of refusal by basics and a subsequent high recruitment of alternates. This implied that the people viewing were more committed to television watching but were not necessarily the cross section of the population that Nielsen promised. As for the accuracy and reliability of the numbers, the committee pointed out that increasing numbers of channels available meant fewer people watching each channel. Smaller shares implied greater margins of error in estimating ratings. The laws of statistics show that smaller proportions are more difficult to measure with precision. Because the number of households watching a particular channel was smaller, each household’s decision carried greater importance, and ratings were more subject to fluctuation. Nielsen became synonymous with United States television audience measurement and expanded television audience research worldwide. By 1990, Nielsen’s metered research covered twenty-eight particular U.S. markets that included half of the country’s population. CONTAM reports 133

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notwithstanding, Nielsen ratings continued to be the currency of negotiation between buyers and sellers of air time, sales of which came to $30 billion in 1990. Programming decision makers in the television industry continued to rely on Nielsen Media Research statistics to determine which programs to air. Bibliography Clark, Eric. The Want Makers. New York: Viking, 1989. This book traces the advertising process from research and creation to the worldwide impact of electronic methods of marketing research and the advertising that results from it. Nielsen, Arthur C., Jr. “Do’s and Don’ts in Selling Abroad.” In International Handbook of Advertising, edited by S. Watson Dunn. New York: McGraw-Hill, 1963. One in a compilation of articles written by experts in the fields of international marketing and advertising. Discusses how to advertise in specific foreign markets and how international advertising is organized. Nielsen Media Research. The Quality Behind the Numbers. New York: Communications Department, Nielsen Media Research, 1992. Outlines the history of the A. C. Nielsen Company in general and its media research in particular, including detailed information on Nielsen’s marketing philosophy, methods, services, and technology. Norback, Craig T., and Peter G. Norback, eds. “Audience Research: A. C. Nielsen Company.” In TV Guide Almanac. New York: Ballantine Books, 1980. This is an overview of all factors of television programming and production, detailing the history, purpose, and methods of audience research used by Nielsen and other research companies as of the 1970’s. Schwerin, Horace S., and Henry H. Newell. Persuasion in Marketing. New York: John Wiley and Sons, 1981. Gives extensive coverage of consumer research and how its results can help in formulating advertising campaigns. A. C. Nielsen’s research techniques are mentioned throughout. Tedlow, Richard S. New and Improved: The Story of Mass Marketing in America. Boston: Harvard Business School Press, 1996. Christina Ashton Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); Congress Establishes the Federal Communications Commission (1934); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); The U.S. Government Bans Cigarette Ads on Broadcast Media (1970); Cable Television Rises to Challenge Network Television (mid-1990’s). 134

THE SUPREME COURT RULES AGAINST MINIMUM WAGE LAWS The Supreme Court Rules Against Minimum WageL aws

Categories of event: Government and business; labor Time: April 9, 1923 Locale: Washington, D.C. By ruling that minimum wage legislation was unconstitutional, the Supreme Court declared its support of laissez-faire policy and upheld the doctrine of freedom of contract Principal personages: George Sutherland (1862-1942), an associate justice of the Supreme Court who wrote the majority opinion in Adkins v. Children’s Hospital William Howard Taft (1857-1930), a former U.S. president, Chief Justice of the United States Oliver Wendell Holmes, Jr. (1841-1935), an associate justice of the Supreme Court Felix Frankfurter (1882-1965), a counsel in support of the legislation in Adkins who later served as an associate justice of the Supreme Court Summary of Event On April 9, 1923, the Supreme Court ruled five to three in the case of Adkins v. Children’s Hospital (261 U.S. 525) that minimum wage laws violated the freedom of contract between employers and workers as well as the due process clause of the Fifth Amendment and therefore were unconstitutional. The Court’s decision, surprising to many, was consistent with established laissez-faire economic policies of the time as well as the Court’s own doctrine of freedom of contract that it had been developing since the 135

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Chief Justice William Howard Taft (seated, center) wrote the dissenting opinion in Adkins v. Children’s Hospital. (Library of Congress)

late 1890’s but would eventually repudiate in its 1937 decision in West Coast Hotel v. Parrish (300 U.S. 379). The freedom of contract doctrine held that private parties to a contract were to be free from state intervention except in those limited cases in which public health, welfare, or the morals of the community were involved. A minimum wage law had been adopted by Massachusetts in 1912, quickly followed by similar laws in several other states. The Adkins case stemmed from a 1918 federal law that created a Minimum Wage Board within the District of Columbia. The board’s function was to inspect working conditions and then establish a legal minimum wage after negotiating with representatives of employers and employees. Moreover, the board was given the power to enforce its standards of minimum wages in order to protect female and teenage workers within the District of Columbia from economic conditions detrimental to their “health and morals.” Failure of an employer to abide by the act was classified as a misdemeanor and carried a possible fine and imprisonment. In 1920, the board determined that the cost of the “necessaries of life” had risen to a minimum of $16.50 a week and that many of the women working in the district’s hotels, restaurants, and hospitals were being paid less, often much less, than the estimated living wage. The Children’s Hospital, which employed a large proportion of women, refused to pay the wage set by the board. The hospital, along with others, brought suit to challenge the authority of the board to set wages. 136

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The case was argued before the Court by Harvard Law School professor Felix Frankfurter in collaboration with the National Consumers League. Frankfurter would later take a seat on the Court as an associate justice in 1939. In this case, Frankfurter stressed that the law had not harmed local industry or reduced the level of employment and in fact had improved the welfare of the district’s women and children. He and his supporters submitted a large volume of documentary evidence in support of their arguments but ultimately failed to convince the Court that minimum wage legislation was valid. The opponents of the legislation held to a basic conservative argument of the need to protect private property and stressed the importance of freedom of contract. Writing for the majority, Justice George Sutherland held that the 1918 law not only disrupted the right of a private contract but also violated the right of property protected by the due process clause of the Fifth Amendment. He argued that the right of private contracts could be restrained only in exceptional cases and that in the view of the Court, at least for the time being, labor relations were largely beyond the police powers and regulatory powers of the states, Congress, and the courts. Since earlier rulings had given mixed signals about when and where it was appropriate to set maximum work hours, the opinion in Adkins drew a sharp distinction between minimum wage laws and maximum hour laws. In Adkins, the Court held that contractual wages are appropriately set by the value of labor in the free market and that any attempt to fix wages placed a burden upon private employers concerning what in fact was a social issue. In Muller v. Oregon, the Court had ruled in 1908 that because of the state’s interest in women’s health it could, because of gender, legitimately set maximum hours. Because the decision in Adkins was handed down after the adoption of the Nineteenth Amendment in August of 1920, the Court’s opinion also held that gender differences did not constitute a valid reason to ignore freedom of contract. Chief Justice William Howard Taft, normally fairly conservative, issued a rare written dissent to the Court’s decision in Adkins. Taft contended that laws could, in certain situations, be enacted to limit freedom of contract. It was, for example, within the police powers of the states, or Congress, to set maximum hours as well as to establish minimum wages. His dissent questioned the majority’s distinction between wages and hours as a test of the liberty of contract, noting that one was as important as the other. Taft went on to note that although the adoption of the Nineteenth Amendment provided women with some political power, it did nothing to alter the physical distinctions between women and men. Constitutional issues therefore did not need to be recast simply because of its adoption. Also dissenting in the Adkins decision was Justice Oliver Wendell 137

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Holmes, Jr., who accepted the notion that Congress had the power to establish minimum wage rates for women in the District of Columbia but then questioned the constitutionality of liberty of contract. As Holmes noted, laws exist to forbid people from doing things they want to do. He questioned why labor contracts should be singled out for exemption. Holmes listed several cases in which liberty of contract had been limited by statute with validation by the Court. The attempt by Holmes to get the Court to abandon its doctrine of liberty of contract would not be accepted by a majority of the Court for some years, but in his dissent he expressed the difference in approach that the justices had concerning economic issues and labor relations. In the view of Holmes, an appointed board could be held to reasonably determine a standard for a living minimum wage. Such a standard need not come from the operations of a free market. Impact of Event The Court’s decision in Adkins demonstrates the impact that laissez-faire policies had upon judicial temperaments, the economy, and the citizens of the United States in the 1920’s and 1930’s. The decision reflected popular, although not universal, opinion toward labor relations in the late nineteenth and early twentieth centuries. A direct impact of the Adkins decision was its use throughout the 1920’s and early 1930’s to overturn several states’ minimum wage laws and other early New Deal legislation. The times and opinions were changing, however, and the Court’s earnest endorsement of freedom of contract in Adkins would be overturned in 1937. The initial reaction to the Court’s ruling in Adkins was mixed. Those who favored a free and open market hailed it as an important and necessary endorsement of private property and the protection of freedom of contract under the due process clauses. Those who favored direct regulation of economic and social conditions attacked it as a shameful example of inhumanity. The New Republic, for example, ran an editorial stating that the Court had in effect endorsed the legal right to starve. Whether one agrees with the Court’s ruling in Adkins, the case makes it clear that wages and prices are central to the operation of an economy. For that reason, various groups followed this case very closely. Groups opposed to minimum wage legislation had long stressed that these laws were potentially harmful not only to industry but also to labor itself. Harm would result as unemployment rose in response to higher legislated wages. Rising labor costs would be imposed on business and passed along to consumers. Labor groups themselves would have diminished ability to bargain. Those in favor of minimum wage legislation attempted to refute these claims. They argued that these laws protected the weak; raised standards of living, health, and 138

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welfare; improved bargaining power; and provided benefits to employers by increasing morale and worker efficiency. Others debated the significance of an absolute power to fix wages. Did, for example, the right to set a minimum wage then also imply the ability to set a maximum wage? Was it feasible to determine and then fix a workable wage or a living wage? How would work performed at home be legislated? How would the enforcement of a minimum wage be handled? Because of the precedence it placed on freedom of contract, this decision was a major setback to the progressive labor movement. During the early decades of the twentieth century, progressive groups sought legislative remedies for many of the inequities and problems they believed existed in labor relations. The gains made by these groups were, at least for the time being, stalled by this ruling. The Court had ruled in essence that the free marketplace and not mandated regulation would guide the decisions of society. Since minimum wage legislation was seen as a means to regulate as well as prohibit certain labor practices, progressive groups had hoped that the Court would rule to uphold the minimum wage as a means of protecting the health and welfare of women and children. Conservatives saw minimum wage legislation simply as an unconstitutional intrusion into private affairs between employers and employees. The Court’s ruling in this case, among others, provides a good deal of insight into the role of women and children in the American economy during the early years of the twentieth century. Minimum wage legislation often specified that the health and welfare of women and children were to be protected by a minimum living wage. This emphasis can be explained by the fact that gender- and age-specific legislation was more likely to be accepted, or alternatively that women and children were employed in less-productive industries, had lower wages, and had less bargaining power in the market, thus necessitating legislation on their behalf. By ruling minimum wage legislation unconstitutional, the Court demonstrated a belief in the merits of a marketplace free from government intervention. The decision in Adkins affirmed the Court’s belief that the freedom of contract doctrine remained, at least for the time, paramount to the operation of the free market. Moreover, if the freedom of contract doctrine were broadly applied, the nation, the economy, and labor relations would remain dominated by laissez-faire policies. The significance of this was made obvious in the West Coast Hotel v. Parrish decision, which upheld a Washington State minimum wage law and overturned Adkins. In that decision, Chief Justice Charles Evans Hughes dismissed the primacy of freedom of contract and instead argued that due process was what was in the interests of the community. 139

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With the repudiation of the Adkins decision and an abandonment of a laissez-faire approach to social and economic problems, the roles of federal, state, and local governments clearly changed. The relative impact of the legislation that followed in the wake of the Court’s later ruling remains a matter of considerable debate. Bibliography Brandeis, Louis D., and Josephine Goldmark. Women in Industry. Reprint. New York: Arno Press, 1969. A summary of the Supreme Court’s decision upholding the constitutionality of the ten-hour workday. Helps to put labor issues and the debate on gender and the workplace into the context of the early twentieth century. Hall, Kermit L., ed. The Oxford Companion to the Supreme Court of the United States. New York: Oxford University Press, 1992. A useful guide to the history of the Court, its major decisions, every justice who has served on the Court, and doctrines that have guided and influenced the Court since its founding in 1789. Concise yet detailed entries help to make landmark cases and legal terms accessible to a variety of users. ______, ed. The Oxford Guide to United States Supreme Court Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Nichols, Egbert Ray, and Joseph H. Baccus, eds. Selected Articles on Minimum Wages and Maximum Hours. New York: H. W. Wilson, 1936. Outlines and defines the debate on whether Congress has the power to fix minimum wages and maximum hours for workers. Reprints of editorials and comments offer a variety of legal, political, and economic interpretations. Nordlund, Willis J. The Quest for a Living Wage: The History of the Federal Minimum Wage Program. Westport, Conn.: Greenwood Press, 1997. Stigler, George J. “The Economics of Minimum Wage Legislation.” American Economic Review 36 (June, 1946): 358-365. A concise and nontechnical discussion of the relative efficiencies of minimum wage legislation. Provides and uses evidence on employment and wages in Minnesota in the late 1930’s. Welch, Finis. Minimum Wages: Issues and Evidence. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1978. A reexamination of the issues forty years after the enactment of the federal minimum wage law. Timothy E. Sullivan

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Cross-References Champion v. Ames Upholds Federal Powers to Regulate Commerce (1903); The U.S. Government Creates the Department of Commerce and Labor (1903); The Triangle Shirtwaist Factory Fire Prompts Labor Reforms (1911); Labor Unions Win Exemption from Antitrust Laws (1914); The Norris-LaGuardia Act Adds Strength to Labor Organizations (1932); The CIO Begins Unionizing Unskilled Workers (1935); Roosevelt Signs the Fair Labor Standards Act (1938); Congress Passes the Equal Pay Act (1963).

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IBM CHANGES ITS NAME AND PRODUCT LINE IBM Changes Its Name and Product Line

Category of event: Foundings and dissolutions Time: February, 1924 Locale: New York, New York By discarding its original name, Computing-Tabulating-Recording (CTR), and taking its new one, International Business Machines (IBM) signaled a new corporate direction Principal personages: Thomas J. Watson (1874-1956), the general manager of the company that became IBM Thomas J. Watson, Jr. (1914-1993), the general manager who took over from his father and led IBM into the computer age Charles Ranlett Flint (1850-1934), a promoter who organized CTR and selected Watson to be its leader Herman Hollerith (1860-1929), the inventor of census tabulating machines, which became CTR’s most important product George Fairchild (1854-1924), the first chairman of CTR, who left most of the real work to Watson Summary of Event In 1910, Charles Ranlett Flint created Computing-Tabulating-Recording (CTR). Flint was a colorful promoter who had earlier created American Woolen, United States Rubber, and American Chicle, and who was a founder of the Automobile Club of America. Today CTR would be called a conglomerate, since its divisions were largely unrelated to one another. International Time Recording manufactured time clocks and time cards onto which workers would punch their hours of arrival and departure. The Computing Scale Company of America’s primary product was a scale that 142

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came equipped with a chart enabling a clerk to calculate the price of an item from its weight and price per pound. Tabulating Machine Company produced machines used to tabulate results from the 1890 census and the cards on which information was punched. This last company was to prove the key element of CTR’s success. Its founder, inventor Herman Hollerith, worked at the Census Bureau, where difficulties had developed in the tabulation of the 1880 census. It seemed clear then that unless some mechanical way was invented to speed calculations, the 1890 counting would take more than ten years to complete and would thus continue into the 1900 census year. Hollerith developed a machine that punched census information such as race, sex, age, and address onto cards. The cards could be fed into a sorter that would group them according to any desired set of data that had been punched. An operator could then count them, thus completing the task. The machines were huge successes, but the government refused to buy them, seeking instead to lease them. Hollerith agreed, noting later that although the machines eventually turned profits, the real returns came from the sale of the punch cards on which data were recorded. Flint considered International Time to be the most promising of the CTR divisions, so its executives dominated the first CTR board of directors. Hollerith was given the job of chief engineer and was not consulted when the company’s officers were chosen. Flint arranged for a $7 million loan to get the company started. The loan had a term of thirty years at an interest rate of 6 percent, high by the standards of the time. Lenders apparently considered the company to pose a relatively high risk. George Fairchild became CTR’s first chairman. As the former president of International Time, he was a logical choice. Fairchild had been elected to the House of Representatives in 1906 and had just been named by President William Howard Taft to a ministerial post in Mexico. Fairchild thus became the firm’s nominal leader, but Frank Kondolf, the former chief operating officer at International Time, performed day-to-day management. Kondolf did not impress Flint, who embarked on a search for another leader. Flint discovered Thomas J. Watson, today considered to be one of America’s premier businessmen. Watson came from the small town of Painted Post, near Corning, in upper New York. After holding several jobs in sales, in 1895 Watson accepted a trainee position at National Cash Register (NCR), whose chief executive officer, John Patterson, was a pioneering figure in the fledgling business machine industry. Patterson extolled the role of salesperson, which he considered to be the key role in the firm. At a time when salespeople were considered to be somewhat 143

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disreputable, NCR trained its sales force to be straightforward, prompt, and solicitous of customers’ interests. Watson learned well and quickly rose through the ranks to become NCR’s star salesman in upper New York. In 1903, Watson was summoned to NCR’s Dayton, Ohio, headquarters and told of a plan to smash the company’s competition. He would establish a company, to be known as Watson’s Cash Register & Second Hand Exchange, that would undersell competitors and force them out of the business. He began operating in New York City, then went on to Philadelphia and Chicago. The company was quite successful, but its secret ties with NCR were in violation of antitrust laws. In 1910, American Cash Register filed antitrust complaints against NCR. Two years later, the federal government joined in the case, charging Patterson, Watson, and others with criminal violations. They were found guilty in 1913 and sentenced to fines and prison terms. Appeals followed, and in 1915 the courts found deficiencies and unfairness in the original trial, ordering a new one. The matter was dropped, but in the process Patterson and Watson had quarreled. Patterson had fired Watson, who now was available to Flint and CTR. Flint offered Watson the post of general manager at a salary of $25,000 per year, until the criminal charges were settled. He accepted and began work in May, 1914. After an examination of the CTR businesses, Watson decided that Tabulating Machine Company had the most promising line of products. In addition to the general managership of CTR, he assumed the presidency of that company. After the antitrust suit against him was dropped, he became president of CTR as well. Watson placed his own men in positions of leadership and devised new markets for tabulating machines. The Hollerith model was employed by corporations to keep inventories and by railroads to maintain schedules. They were leased, with the cards used to operate them sold outright. As with the census machines, the leases provided a steady cash flow, and the cards supplied large profits. By 1918, CTR was producing thirty million cards monthly for the Midwest alone. All the while, sales of time clocks and scales stagnated. Fairchild died in December, 1924, whereupon Watson assumed the title of chairman along with the position of chief executive officer. Earlier in the year, he had decided to change the company’s name to reflect its new business concentration. In 1917, he had christened the company’s Canadian subsidiary International Business Machines. In February, 1924, he replaced CTR’s corporate designation with the same name.

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Impact of Event The alteration of a company’s name is hardly a major event in itself, but this one signaled a change in corporate direction. In time, scales and clocks would be discarded from the company’s product lines, and Watson would concentrate on business machines. Under Watson’s leadership, IBM’s engineers designed accounting and other machines, breaking through into new areas. IBM purchased a small company that manufactured electric typewriters and made it the leader in a growing field. Columbia University professors conceived a plan to develop multiple-choice tests that could be taken on standard forms and graded by machine. Watson provided the researchers with material and machines, and out of this came standardized tests graded by machines—IBM machines. The company also produced millions of forms to be used with various machines. IBM produced large calculators capable of performing computations in minutes that previously had taken hours. It developed machines to process payrolls, with the payroll checks created on IBM cards. During World War II, IBM created machines for the military. By the war’s end, IBM had annual revenues of $142 million and earnings of $10.9 million. Remington Rand, a competitor in some fields, had sales of $133 million but earnings of only $5.3 million. Remington Rand then purchased UNIVAC, a small entity attempting to develop the first computer, from American Totalizator. Remington Rand and its large electromechanical computers won the contract for the 1950 census from a stunned IBM. Tom Watson, Jr., who had come into contact with military computers during the war, urged his father to develop an interest in them. The elder Watson demurred. Research indicated that at best only a dozen or so computers might be sold. Besides, IBM was the master in large calculators, which really were computers without programs or memories. He wondered about the wisdom of giving up a leadership position to devote more energy to an untested technology. The younger Watson persisted, and IBM entered the computer arena. With superior research and salesmanship, IBM drew close to UNIVAC and then surpassed it. In 1953, UNIVAC had most of the computer market; by 1955, IBM led in terms of placements. Other firms soon entered the field, including Burroughs, NCR, Honeywell, General Electric, and RCA. There were some new companies to contend with, led by Control Data, Digital Equipment, and Scientific Data Systems (soon to be acquired by Xerox). In the mid-1960’s, IBM created a new line of data processing equipment known as the 360 series. Based on integrated circuits, these machines would 145

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make obsolete many highly successful machines then in production. Tom Watson, Jr., was taking the same kind of gamble as general manager of IBM that he did when entering the computer market. The line was a success, increasing IBM’s lead over its rivals. Several left the field or sold off their computer operations. Some new companies appeared that attempted to emulate IBM machines and sell them at lower prices. IBM accelerated the introduction of new mainframe computers, and the upstarts faltered. They could not copy the IBM products quickly enough to earn a profit before IBM introduced a new product that made the old copies unsalable. Watson retired in 1971 and was succeeded in turn by Vincent Learson, Frank Cary, John Opel, and John Akers. IBM remained the industry leader into the 1970’s. Although rivals complained that their machines delivered more power for the buyer’s dollar, IBM’s support system was such that users of equipment still preferred “Big Blue.” Change was coming, however, and this time IBM faltered. In the mid1970’s, few people had heard of the small desktop computers fashioned from parts by enthusiasts. Soon, however, desktop computers were on sale to office managers. Sales to individuals followed shortly thereafter. The first buyers used them as replacements for typewriters, using their word processing capacities. As more programs were written and marketed, the small machines were used for other functions, many of which had in the past required much larger computers. Each company had its own software, or programs, which rarely worked on a competitor’s machines. IBM entered the personal computer market in 1981 and announced that its “architecture,” or basic machine structure, would be available to competitors. Programs thus could be written to be compatible with machines produced by more than one company. This move was hailed by the industry but may have been an error. Using basic operating software from Microsoft and computer chips from Intel, IBM made it possible for many rivals to enter the field by purchasing components rather than seeking permission to use IBM patents. Small computers became increasingly powerful, cutting into IBM’s sales and leases of larger units. They became “commodity” products, ones for which brand name was relatively unimportant to buyers. They knew what a personal computer was supposed to do, and almost all the machines on the market performed those tasks with approximately the same proficiency and speed. IBM had a difficult time marketing its products as superior. IBM responded by purchasing ROLM, a manufacturer of sophisticated telephonic equipment, and taking an interest in MCI Communications, a rival to American Telephone and Telegraph (AT&T) in long-line telephon146

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ics. Clearly IBM intended to branch out into areas related to data transmission. Both forays failed, and IBM abandoned the fields. Although IBM made a promising start in the personal computer (PC) field, the company soon stumbled. Its small PC Jr. was a flop, and the company did not have a plausible entry in the laptop and notebook markets until the early 1990’s, far behind competitors. By then, Akers had embarked on a series of restructurings, and it was clear that the company was foundering. In late 1992, Akers announced further cutbacks and a $6 billion charge against restructuring, hinting that more was to come, including a dividend cut. Tom Watson, Sr., had erected a masterful company through his abilities to adjust to new markets and even to create them. His son did even better as he engaged in what economist Joseph Schumpeter called “creative destruction,” forcing obsolescence by introducing new products. Whether IBM could have avoided the pitfalls of the 1980’s and 1990’s is sure to be debated. Bibliography Belden, Thomas. The Lengthening Shadow: The Life of Thomas J. Watson. New York: Little, Brown, 1962. The first biography of Watson, written with IBM’s support. Unduly flattering but useful in showing the kind of image the company hoped to set forth. Maisonrouge, Jacques. Inside IBM: A Personal Story. New York: McGrawHill, 1989. Maisonrouge was a senior officer at IBM who worked closely with both the Watsons. Pugh, Emerson W. Building IBM: Shaping an Industry and Its Technology. Cambridge, Mass.: MIT Press, 1995. Useful history, both as a case study of IBM and as an overview of the computer industry generally. Contains an extensive bibliography and an index. Rodgers, William. Think: A Biography of the Watsons and IBM. New York: Stein and Day, 1969. An early history and biography. Valuable for its point of view on the company during the early years of the computer era. Sobel, Robert. I.B.M.: Colossus in Transition. New York: Times Books, 1981. A standard history of the company during its period of growth and power. Watson, Thomas J., Jr. A Business and Its Beliefs: The Ideas That Helped Build IBM. New York: McGraw-Hill, 1963. Delivered as part of the McKinsey Foundation Lecture Series, sponsored by Columbia University. This is the clearest statement of the IBM philosophy available. Watson, Thomas J., Jr., and Peter Petre. Father, Son, and Company: My Life at IBM and Beyond. New York: Bantam, 1990. Describes Watson’s 147

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relations with his father, with some material on the early history of IBM. Watson, Thomas J., Sr. Men-Minutes-Money. New York: IBM, 1934. Watson’s interpretation of IBM’s philosophy and policies, indicating how money was spent on research and production. Robert Sobel Cross-References Jobs and Wozniak Found Apple Computer (1976); CAD/CAM Revolutionizes Engineering and Manufacturing (1980’s); IBM Introduces Its Personal Computer (1981); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999); Dow Jones Adds Microsoft and Intel (1999).

148

CONGRESS RESTRICTS IMMIGRATION WITH 1924 LEGISLATION Congress Restricts Immigration with 1924 Legislation

Category of event: Labor Time: May 26, 1924 Locale: Washington, D.C. The Immigration Act of 1924 reflected widespread restrictionist sentiment after World War I, severely limiting the numbers of immigrants permitted to enter the United States from Southern and Eastern Europe each year Principal personages: Albert Johnson (1869-1957), a congressman from Washington, coauthor of the act David A. Reed (1880-1953), a senator from Pennsylvania, coauthor of the act William P. Dillingham (1843-1923), the chair of the Senate Immigration Committee and designer of quota systems Charles Evans Hughes (1862-1948), the secretary of state under President Calvin Coolidge A. Mitchell Palmer (1872-1936), the attorney general of the United States, 1919-1921 Henry Cabot Lodge (1850-1924), a senator from Massachusetts and opponent of “new” immigration Samuel Gompers (1850-1924), the leader of the American Federation of Labor Summary of Event The Immigration Act of 1924 provided for a system of quotas for immigration into the United States, drastically limiting the numbers of 149

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people from Southern and Eastern Europe who could enter the country, especially in comparison with more “favored” national groups from Northern and Western Europe. As a result of strong pressure from American employers dependent on Latin American laborers, the measure included few restrictions on immigrants from the Western Hemisphere. Otherwise, the immigration of groups deemed by restrictionists to be not “American” enough was severely curtailed. Immigration legislation had been passed by Congress, after contentious debate, on several occasions prior to 1924. A quota system passed in 1921 provided that people of each European nationality could enter the United States based on a percentage of their group’s population in the United States in 1910. That 1921 Immigration Act allowed only about 350,000 immigrants from Europe per year, most of them from the “preferred” national groups in Northern and Western Europe. It had several loopholes. By 1924, few voices were raised against the further restriction of immigration. Some individuals called for a complete shutdown. The Immigration Act of 1924, also known as the Johnson-Reed Act for its congressional sponsors, Congressman Albert Johnson of Washington and Senator David A. Reed of Pennsylvania, set national quotas based on estimates of the national origins of residents in the United States at the 1890 census. That the Senate Immigration Committee, headed by Senator William P. Dillingham, chose 1890 as the date from which to calculate national origins was significant. That year was prior to the most extensive immigration from Southern and Eastern Europe, particularly Italy and the Balkan countries. Immigration to the United States from all areas rose tremendously in the late nineteenth century, but after 1896 most European immigrants came from areas different from those of previous immigrants. A large proportion of immigrants in the mid-1800’s had been from Western Europe, particularly the British Isles and Germany. Pressures such as the Irish potato famine of the 1840’s and the Franco-German conflicts in the third quarter of the century created these immigrant flows. The “new” immigrants, as they were called to distinguish them from immigrant groups already established in the United States by the 1890’s, stood out in part simply because they came from other parts of Europe and the world, not only Southern and Eastern Europe but also, in significant numbers, Japan and the Far East. The new immigrants could be differentiated from native-born residents of the United States and earlier immigrant groups on grounds other than their national origins. They were often physically distinguishable, with darker skin or non-“white” color (such as olive-skinned Italians or the Asian peoples), or smaller stature. They were different religiously from earlier 150

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groups, with many Southern Europeans being Catholic and Asian immigrants being non-Christians, in contrast to the Protestantism (excepting the Irish) of earlier immigrant groups. The new immigrants settled in unprecedented patterns as well. Generally, they were not as drawn to farms in the Midwest as to urban and industrial communities and mining areas in the Northeast.

Part of the purpose of the congressional legislation was to restrict the immigration of Southern Europeans, such as this Italian family. (Library of Congress)

Restriction of immigration through legislation had broad support in 1924. A few efforts to moderate the provisions of the Johnson-Reed Act, such as the attempt by Secretary of State Charles Evans Hughes to make the act comport with earlier diplomatic agreements allowing residency for certain Japanese aliens, were rebuffed by Congress. The reasons advanced for limiting or stopping new immigrant groups from coming to the United States included humanitarian concerns about urban overcrowding, arguments about preserving the purity of a supposed “Nordic” race, scientific and pseudoscientific concerns about racial characteristics, pleas to limit the labor supply, and arguments about the alleged links between the new immigrants and radical political movements. A few groups, including 151

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organizations representing business such as the National Organization of Manufacturers, consistently argued against limitations on immigration, hoping that immigration would provide continued flows of inexpensive (and often nonunion) factory and unskilled labor. Their desires were drowned out in the calls for restriction. Labor leaders such as Samuel Gompers, who in the 1910’s had been uncomfortable with the tone of restrictionist proposals, became convinced of the need to ensure the “Americanism” of the labor force after World War I. The hiring of immigrant laborers as strikebreakers in several incidents increased organized labor’s fear that the new immigrants were too tractable in the hands of employers and would undercut existing pay rates. The inflation and massive unemployment of the early 1920’s made the labor movement even more desperate to eliminate “foreign” (that is, new immigrant) competition for jobs. The supporters of immigration restrictions in the years prior to passage of the 1924 act found justifications for their ideas among authors who wrote about the physical classification of human beings. Such writers on race ranged from trained biologists, geologists, and geneticists such as Francis Galton of England to amateur scientists and historians such as the widely read Madison Grant of New York City. Many of the restrictionists believed that they were practicing the science of “eugenics,” or “good breeding,” when they recommended that “inferior” national groups such as Southern Europeans should not be allowed to “water down” the primarily whiter, Protestant, and “Nordic” groups that had arrived in the United States earlier. Such arguments found acceptance among some supporters of social Darwinism, who believed that the “Nordic” Northern Europeans were engaged in a battle for species survival. Among highly educated people in the United States, an acceptance of tenets of eugenicism and social Darwinism was widespread. Many offered it as an explanation for the success of their own well-established families. To even more extreme groups such as the Ku Klux Klan, which was at its height in influence in the postwar years, eugenics provided a “scientific” explanation for the most vicious forms of xenophobia and racism. Nativism had been given powerful impetus by several high-profile governmental officials in the wake of World War I and the Bolshevik Revolution. U.S. Attorney General A. Mitchell Palmer launched a series of actions against radical groups and rounded up foreign agitators for deportation from the United States in 1920. Although the Palmer Raids netted only a small number of people who finally were forced to leave the country and Palmer’s “Red Scare” helped discredit its instigator, a number of political leaders, including the young J. Edgar Hoover, who had been appointed head 152

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of the new General Intelligence Division in the Department of Justice, remained convinced that there was an intimate link between radicalism, disloyalty to the United States, and new immigrants. The assumption that Italians, for example, were prone to anarchism and violence pervaded the internationally famous trial of Nicola Sacco and Bartolomeo Vanzetti in the mid-1920’s. Impact of Event The strong provisions of the Immigration Act of 1924 cut immigration to levels much lower than prior to the beginning of the new immigration, especially as supplemented by stepped-up enforcement in the late 1920’s and 1930’s, when fears about unemployment were even more pressing. Because some countries such as Great Britain, a “preferred” nation to the restrictionists, never filled their yearly quotas, actual annual immigration under the act was much lower than the total of 150,000 people allowed. In contrast, 1,285,000 immigrants entered the United States in 1907, the highest year of immigration. Although migration from Mexico had not been formally regulated by the 1924 act, enough small farmers began complaining about immigrants serving as cheap labor for large-scale cotton producers to pressure diplomats into restricting Mexican immigration through much stricter enforcement of visa regulations. The fervor of restrictionist arguments moderated somewhat by the 1930’s, especially as eugenics fell into disfavor because of its increasing association with fascism in Europe and as scandals smeared the reputation of the Ku Klux Klan. Ironically, however, despite Americans’ mounting dismay at arguments about racial purity being advanced by Adolf Hitler, immigration restrictions (motivated in some instances by anti-Semitism) served as a powerful method for limiting immigration by Europeans seeking refuge from Nazi persecution. President Franklin D. Roosevelt refused to press for changes in immigration regulations and in the law of political asylum that would have granted admission to the United States to thousands of individuals, including children. Immigration restriction as a national policy was severely tested by refugees from several areas of the world in the late 1940’s, including people fleeing from new communist governments. The Cold War saw renewed fears within the United States that foreigners, especially from certain areas, might be spies or anti-American. Despite some administrative sympathy for refugees, notably in the administration of Harry S Truman, legislation such as the Internal Security Act of 1950 and the McCarran-Walter Act of 1952 (both passed over presidential veto) contained strict regulation of potential subversives, strengthened the authority of government agencies to enforce 153

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immigration legislation, and kept the quota system in place. The quota system remained as a guiding principle in U.S. immigration policy until 1965, when new grounds for establishing a person’s suitability for entry into the country as a resident were established. Incremental changes in immigration law in the 1950’s and early 1960’s had provided for the reuniting of some immigrant families, but sweeping reforms of the quota system were blocked for a time by key members of Congress who still advocated restriction. Wholesale reform of immigration law was urged by organized labor, which long since had absorbed “new” immigrants as members, and by religious and intellectual groups that viewed the quota system as needlessly discriminatory. The authors of the Immigration Act of 1965 allowed for a “brain drain” of skilled and professional immigrants from the rest of the world into the United States, in part as a compromise with congressional restrictionists to assure them that immigrants would be productive additions to American society. With the passage of the act of 1965, no longer would one’s national origin be the primary determinant of ability to enter the United States. The usefulness of an individual’s occupation, which first was provided as a consideration in the McCarran-Walter Act, and the necessity for political asylum could count in favor of a potential immigrant. The total number of immigrants was increased to 170,000 annually. Much as had been the case prior to 1924, legal immigration after 1965 stemmed more from Mediterranean countries, Asia, and Mexico. Bibliography Calavita, Kitty. U.S. Immigration Law and the Control of Labor, 1820-1924. London: Academic Press, 1984. A theoretical discussion of United States immigration policy, heavily informed by neo-Marxist analysis of the role of the state in promoting capitalism. Argues that pressure for the 1924 act was widespread and not attributable to any single group or set of interests. Higham, John. Strangers in the Land: Patterns of American Nativism, 1860-1925. New York: Atheneum, 1974. Exploration of reasons for nativism among an assortment of groups in American society. Subtly explains the existence of xenophobia in some religions’ traditions and the appeal of restrictionist and racist organizations such as the Ku Klux Klan. Full bibliographic essay, including references to ethnic and specialized newspapers. Hutchinson, E. P. Legislative History of American Immigration Policy, 1798-1965. Philadelphia: University of Pennsylvania Press, 1981. Encyclopedic discussion of all major pieces of immigration legislation con154

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sidered and passed by Congress. Chronicles changes in the form of various bills as they passed through committees and floor discussions. Kessner, Thomas. The Golden Door: Italian and Jewish Immigrant Mobility in New York City, 1880-1915. New York: Oxford University Press, 1977. Uses a variety of local records, including census materials, to argue that “new” Italian and Jewish immigrants in New York City were upwardly mobile, despite the fears of nativists. LeMay, Michael, and Elliott Robert Barkan. U.S. Immigration and Naturalization Laws and Issues: A Documentary History. Westport, Conn.: Greenwood Press, 1999. Collection of primary documents on immigration history, with bibliographical references and index. Taylor, Philip. The Distant Magnet: European Emigration to the U.S.A. New York: Harper & Row, 1971. Vivid and readable account of the motivations for and experience of immigration to the United States, drawn from diverse source material including photographs. Captures the pathos and richness of a variety of cultures and the venom of restrictionist arguments. Elisabeth A. Cawthon Cross-References The U.S. Government Creates the Department of Commerce and Labor (1903); The United States Begins the Bracero Program (1942); The Immigration Reform and Control Act Is Signed into Law (1986); The North American Free Trade Agreement Goes into Effect (1994).

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THE TEAPOT DOME SCANDAL PROMPTS REFORMS IN THE OIL INDUSTRY The TeapotD ome Scandal Prompts Reforms in the Oil Industry

Category of event: Government and business Time: December 18, 1924 Locale: Washington, D.C. The Federal Oil Conservation Board, established in the wake of the Teapot Dome scandal, increased federal regulation of the U.S. petroleum industry Principal personages: Albert B. Fall (1861-1944), the secretary of the Interior, 1921-1923 Josephus Daniels (1862-1948), the secretary of the Navy, 1913-1921 Robert M. La Follette (1855-1925), a U.S. senator, (1906-1925) Thomas J. Walsh (1859-1933), a U.S. senator, 1913-1933 Calvin Coolidge (1872-1933), the president of the United States, 1923-1929 Gifford Pinchot (1865-1946), the chief of the Division of Forestry in the Department of Agriculture, 1898-1905 Harry F. Sinclair (1876-1956), the president of the Mammoth Oil Company Edward Doheny (1856-1935), the president of the Pan-American Petroleum and Transport Company Summary of Event In 1921 and 1922, Secretary of the Interior Albert B. Fall, after transferring federal lands designated for naval oil reserves from the Secretary of the 156

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Navy’s jurisdiction to his own department, awarded leases on the Teapot Dome area in Wyoming and Elk Hills, California, to the Mammoth Oil Company and the Pan-American Petroleum and Transport Company. Senate investigations in October, 1923, of Fall’s actions revealed that Fall had accepted $400,000 in loans from executives of those companies. The resulting political scandal forced Fall to resign and heightened public concerns over federal regulation of petroleum resources. President Calvin Coolidge, under pressure from public opinion, conservationists, and a number of leaders from the petroleum industry, on December 18, 1924, created the Federal Oil Conservation Board (FOCB), composed of the secretaries of War, Navy, Interior, and Commerce. The FOCB was to bring greater federal involvement in petroleum conservation regulation, but it also provided a forum for the industry to voice its concerns to the federal government. The idea of reserving petroleum-bearing lands for exclusive federal use, especially for the military, went back to the early twentieth century. The U.S. Navy had changed its coal-burning engines to petroleum-based internal combustion engines in 1904, and the army would increasingly use trucks and automobiles. Thus the U.S. military was becoming dependent upon petroleum products. On September 27, 1909, President William H. Taft issued an executive order that withdrew from private use 3,041,000 acres of land in California and Wyoming for exclusive federal use. From late 1909 through 1910, the federal government withdrew lands in western states for the maintenance of petroleum reserves. The issue of federal petroleum reserves came to the forefront during World War I. American oil played a crucial part in the war effort, and thus petroleum was established as a commodity of strategic importance. Secretary of the Navy Josephus Daniels, seeking to ensure that the Navy had an adequate supply of oil during and after the war, in 1917 planned to have lands set aside for exclusive federal petroleum reserves. In 1920, as the Navy faced a shortage of oil and as pressure from private interests to open up federal lands for oil production intensified, Daniels drafted an amendment to the general Mineral Lands Leasing Act of 1920 allowing the Secretary of the Interior to grant leases to private companies to produce crude oil on federal lands, thus making petroleum supplies available to the Navy. High production levels during the war, fed by rising prices and endless federal demand, heightened concerns over waste, exhaustion of oil reserves, price, and industrial stability. Production across the nation rose from 265 million barrels of oil in 1914 to 355 million in 1918. Oil production continued to increase, at an even greater rate, after the war, rising from 472 157

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million barrels in 1921 to 732 million in 1923. Oil prices fell from $3.08 per barrel in 1920 to $1.78 in 1921, then to $1.34 in 1923. The price remained around $1.30 for the rest of the decade before declining precipitously with the economic depression of the 1930’s. Leaders of the oil industry feared an immediate and severe price deflation and consequent economic collapse in the industry. In addition, with production levels reaching new highs each year, conservationists, government officials, and a number of oil executives beAfter the death of Warren G. Harding, it was left to gan to fear exhaustion of dohis successor, Calvin Coolidge (pictured) to re- mestic petroleum reserves in solve the problems caused by Teapot Dome. (Li- the near future. During the brary of Congress) early 1920’s, fears of oil shortage were overshadowed by concerns of oversupply, price deflation, and economic chaos for the petroleum industry. Conservation of petroleum increasingly came to be seen as an answer to each of these problems. It was in this context that pressure from the Teapot Dome scandal led to creation of the FOCB. When Albert B. Fall became Secretary of the Interior under President Warren G. Harding, he faced immediate suspicion from conservationists. Fall, a former U.S. senator from New Mexico, represented southwestern interests that advocated unrestrained development of natural resources by the private sector. In May, 1921, using the amendment that Daniels wrote to the Mineral Lands Leasing Act of 1920, Fall had authority over federal reserves transferred from the Secretary of the Navy to his Department of the Interior. In July, 1921, Fall leased federal lands in Elk Hills, California, to Edward Doheny of the Pan-American Petroleum and Transport Company. In April, 1922, Fall leased the Teapot Dome tract in Wyoming to Harry F. Sinclair of Mammoth Oil Company. The transfer of naval reserves to private interests not only further enraged Fall’s critics but also gave them something to focus on. Fall already had been branded as anticonservationist by critics such as senator Robert 158

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M. La Follette (R-Wisconsin) and Gifford Pinchot, former chief forester under Theodore Roosevelt. Daniels, who had drafted the amendment allowing the Secretary of the Interior to oversee the naval supply, distrusted Fall’s intentions. With Daniels’ support, in 1923 Pinchot and La Follette investigated Fall’s actions. Ultimately, La Follette persuaded Senator Thomas Walsh (D-Montana), a member of the Senate Public Lands Committee, to open Senate hearings on the matter. A rising tide of protest against Fall forced him to resign even before the hearings began in October, 1923. The Senate investigation revealed that Fall had accepted $400,000 in loans from Sinclair and Doheny in return for the public land leases. Historians have noted that had Fall truly desired to profit by exploiting his office, he could have obtained much larger loans from oil interests. Both Doheny and Sinclair were acquitted of bribery, but Sinclair spent several months in jail in 1929 for contempt of the Senate and of court. Fall was later found guilty of accepting a bribe while Secretary of the Interior and was sentenced to a year in jail. The Teapot Dome scandal, coming to attention during the presidential election campaign of 1924, occurred in the context of a public arena of heightened political rhetoric. The scandal resulted in much more focus being placed on federal regulation of the petroleum industry. Calvin Coolidge, who became president after Harding’s death in 1923, created a Naval Petroleum Reserve office in the Department of the Navy in March, 1924. He attempted to shift federal policy from private exploitation back to federal conservation. Coolidge also came under pressure from public opinion, conservationists, and a number of leaders from the petroleum industry to increase federal regulation of the oil industry. On December 18, 1924, Coolidge created the Federal Oil Conservation Board (FOCB). The purpose of the FOCB was to study the government’s responsibilities, with cooperation from representatives of the oil industry. The FOCB was to focus on the three main industry concerns: the size of crude oil reserves, the technical conditions of production, and the economic disruption caused by overproduction. Coolidge commented upon the direct relationship between oil conservation and economic stability, stating that overproduction encourages low prices, which in turn led to wastefulness. The FOCB would also advise the president on the best policy to ensure the future supply of fuel oil for the Navy and to safeguard national security through conservation of oil. From its inception the FOCB was cooperative with and even deferential to the petroleum industry, especially to the American Petroleum Institute (API), the major trade association for the industry.

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Impact of Event In 1926, the FOCB held hearings and attempted to build a consensus among the representatives of various concerns within the petroleum industry on the conservation issue. The FOCB encountered an industry divided on the issue of production controls but united against federal intervention. Larger integrated companies traditionally supported production controls, and smaller companies opposed restrictions. Representatives from the API stated to the FOCB during these hearings that there was no danger of exhausting petroleum reserves, that waste was negligible, and that the government should let the oil industry determine its own prices. The hearings and subsequent actions of the FOCB focused on technical problems of petroleum production. The API’s assertions of the industry’s ability to regulate itself were undermined by continued heavy production in the mid-1920’s. Nevertheless, there were no significant federal production controls imposed in the 1920’s. As production levels increased across the nation in the 1920’s, oil prices continued to fluctuate but primarily fell. The industry and the API abandoned the policy of relying solely on the market to determine prices, realizing that more stringent cooperative private efforts at production control were needed. In early January, 1929, the API announced a policy of voluntary production controls to limit production for the next three or four years, based on 1928 levels. The FOCB approved a version of this code on May 28, 1930. In December, 1928, industry leaders and members of the API set out to institute an industrywide code of ethics designed to eliminate price and nonprice competition in an attempt to bring stability. In July, 1929, the Federal Trade Commission approved this code, with deletions of restrictions on price cutting and extension of credit. The FOCB still refused to implement federal production controls, stating that voluntary efforts would have to be the largest part of any production control program. In March, 1930, the FOCB initiated a program of demand forecasts to help the petroleum industry project market need and produce accordingly. In 1932, the FOCB worked out a system of voluntary informal restrictions with the leading oil importers in the United States. In all these actions, the FOCB helped the petroleum industry to regulate itself. These efforts at industrial self-regulation and production control were swamped by new and even more productive fields in Oklahoma City in late 1929 and East Texas in late 1930. President Herbert Hoover, formerly a member of the FOCB as Secretary of Commerce under Coolidge, took an even stronger laissez-faire approach, stating that the FOCB had no legal power to control production. Hoover believed that responsibility for such actions lay with the Congress, not the executive branch. The FOCB ulti160

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mately urged various forms of self-regulation and left the industry to solve its own problems. The problem of oil conservation regulation was left to the industry itself and to state governments until Franklin D. Roosevelt came into office. The Teapot Dome scandal returned federal policy on naval reserves back toward conservation and preservation. Ironically, despite the political scandal Fall created, his policy may have been the more correct one. Within a decade after the scandal, planners for the Navy realized that some of their reserves had been depleted as a result of drainage. This occurred when production crews drilled on private property adjacent to the federal lands and drained the neighboring petroleum reservoirs. With the New Deal programs of President Franklin D. Roosevelt, the federal government generally increased its regulatory role. The Petroleum Administration Board (PAB) continued in the manner that the FOCB had established. The PAB replaced the FOCB, assuming its duties and taking over its files. The PAB came to an end in May, 1935, when the Supreme Court ruled the National Industrial Recovery Act unconstitutional. The PAB had been created under that act. The Bureau of Mines then began forecasting demand for the oil industry. In response to continuing problems of overproduction, Congress passed the “Hot” Oil Act of 1935, restricting interstate shipment of oil. It also set up, under the Department of the Interior, the Federal Petroleum Board (FPB), which enforced the prohibition against “hot” oil. This federal regulatory agency, like the ones before it, worked closely with the industry and with the state regulatory commissions. The concept of maintaining strategic petroleum reserves was renewed during World War II and the Korean War. Concerns again rose over exhaustion. President Roosevelt created the Petroleum Reserves Corporation (PRC), a government corporation that would exploit Saudi Arabian oil reserves, to conserve petroleum in the United States and counteract British influence in that region. The PRC was short-lived, however, because of opposition from U.S. oil companies, which did not want federal interference in their private efforts to produce oil in the Middle East. During the Korean War, Congress passed the Defense Production Act of 1950, which enabled President Harry Truman to establish the Petroleum Administration for Defense (PAD), which, like the FOCB, made demand forecasts for the industry. The PAD facilitated collective voluntary efforts from nineteen of the largest oil companies to coordinate petroleum supplies. The PAD was dissolved after the war, but in 1954 President Dwight D. Eisenhower began to implement a policy of maintaining reserves equal to 20 percent of domestic annual production. Also in 1954, Eisenhower created the Committee on Energy Supplies. Composed of the secretaries of State, Treasury, 161

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Interior, and Commerce, this committee studied the extent of available domestic petroleum resources as well as the growing problem of U.S. dependence on oil imports from the Middle East. As the United States grew increasingly dependent on oil imports from the Middle East in the 1960’s and 1970’s, the idea of national strategic petroleum reserves was again revived. The Strategic Petroleum Reserve was begun in 1973. In 1990, these reserves held approximately 600 million barrels of oil. Both Germany and Japan adopted similar national petroleum reserves. Bibliography Bates, J. Leonard. The Origins of Teapot Dome: Progressives, Parties, and Petroleum, 1909-1921. Urbana: University of Illinois Press, 1963. This work focuses more on the political events leading up to and including the Teapot Dome scandal than on the actions and policies of the Federal Oil Conservation Board. Useful for its thorough account of the development of the Mineral Lands Leasing Act of 1920, the political debates over federal lands policy, the naval reserves issue, and pressures for legislation during this period. Davis, Margaret L. Dark Side of Fortune: Triumph and Scandal in the Life of Oil Tycoon Edward L. Doheny. Berkeley: University of California Press, 1998. Biography of one of the leading figures in the Teapot Dome scandal. Melosi, Martin V. Coping with Abundance: Energy and Environment in Industrial America. New York: Alfred A. Knopf, 1985. An excellent overview of the growth of the major energy industries in the United States. Contains a concise yet detailed account of the Teapot Dome scandal and the formation and actions of the Federal Oil Conservation Board. Nash, Gerald D. “After Teapot Dome: Calvin Coolidge and the Management of Petroleum Resources, 1924-1929.” In United States Oil Policy, 1890-1964. Pittsburgh, Pa.: University of Pittsburgh Press, 1968. Probably the best work for an introduction and overview of the development of the petroleum industry and the growth of federal and state regulations. Deals especially well with the relationship between the industry and the federal government. Thorough treatment of the Teapot Dome scandal and the Federal Oil Conservation Board. Noggle, Burl. Teapot Dome: Oil and Politics in the 1920’s. Baton Rouge: Louisiana State University Press, 1962. Deals with the politics of petroleum and the federal government. Focuses mostly on the Teapot Dome scandal. Gives only slight attention to the Federal Oil Conservation 162

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Board and the concerns of the petroleum industry in oil conservation regulation. Williamson, Harold F., Ralph L. Andreano, Arnold R. Daum, and Gilbert C. Klose. The American Petroleum Industry: The Age of Energy, 18991959. Evanston, Ill.: Northwestern University Press, 1963. Perhaps the most comprehensive study of the national petroleum industry in the twentieth century. Excellent account of the development, actions, and policies of the Federal Oil Conservation Board. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Deals only briefly with Teapot Dome and the Federal Oil Conservation Board but provides a useful, informative, and readable account of the growth of the oil industry in the United States and in the international arena. Zimmerman, Erich W. Conservation in the Production of Petroleum. New Haven, Conn.: Yale University Press, 1957. Excellent monograph on the development of petroleum conservation policies in the United States. Deals at some length with the Federal Oil Conservation Board. Assumes some familiarity with conservation issues. Bruce Andre Beauboeuf Cross-References Discovery of Oil at Spindletop Transforms the Oil Industry (1901); The Supreme Court Decides to Break Up Standard Oil (1911); Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska (1967); Arab Oil Producers Curtail Oil Shipments to Industrial States (1973); The United States Plans to Cut Dependence on Foreign Oil (1974); The Alaskan Oil Pipeline Opens (1977).

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THE RAILWAY LABOR ACT PROVIDES FOR MEDIATION OF LABOR DISPUTES The Railway Labor Act Provides for Mediation of Labor Disputes

Category of event: Labor Time: May 20, 1926 Locale: Washington, D. C. The 1926 Railway Labor Act set up mechanisms for mediating labor disputes acceptable both to organized labor and to the railroad companies, in the process guaranteeing the right to collective bargaining for workers Principal personages: Calvin Coolidge (1872-1933), the president of the United States, 1923-1929 Harry Daugherty (1860-1941), the U.S. attorney general who secured the sweeping injunction that broke the 1922 strike Warren G. Harding (1865-1923), the president of the United States, 1921-1923 Herbert Hoover (1874-1964), the secretary of commerce under Harding and Coolidge Donald Richberg (1881-1960), a lawyer who served as counsel for the railroad unions in the 1920’s and who held the responsibility for preparing the 1926 Railway Labor Act Summary of Event The 1926 Railway Labor Act brought peace to an industry plagued by strikes and violence. It created machinery acceptable to the railroad carriers and labor to mediate their disputes while guaranteeing labor’s long-sought goal of collective bargaining. The carriers submitted to these terms in 164

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exchange for excluding specific bargaining agents (unions) for labor from the act. This enabled the railroads to maintain their company unions, despite the intent of the act. The origins of the Railway Labor Act lie in a fiercely contested strike in 1922. That action stemmed from wage cuts ordered by the Railroad Labor Board (RLB), an agency charged by the 1920 Transportation Act with monitoring and regulating wages and rates in the railroad industry. Staffed by appointees of President Warren G. Harding, who held strong antilabor views, the RLB rescinded wage increases granted in 1920. This action hit hardest the shopcraft and other workers not directly included in operating the railroads. At the same time, the RLB tolerated the Pennsylvania Railroad’s defiance of the RLB’s orders that carriers restore union contracts that they had unilaterally abrogated and that the carriers also dismantle recently established company unions. Fearing for their long-term survival, the shopcraft and nonoperating unions struck the railroad carriers on July 1, 1922, primarily over the issues of wages and hours. Hurt least by the reductions and conciliated by the RLB’s promise of no further wage cuts, the operating employees remained on the job. Soon the strike took a new turn, as the carriers demanded an end to seniority rights, the very heart of union strength. In order to sustain operations, the companies recruited scores of strikebreakers to fill the positions held by striking workers. By eliminating seniority, the carriers eased their task of rehiring strikers and, as the unions asserted, created a massive surplus of railroad workers. By this measure, the railroad companies had raised the stakes from mere wages to union survival. The unions complained bitterly about the RLB’s decision to urge the carriers to try to break the strike and to allow the companies to broach the seniority issue. Working behind the scenes, Secretary of Commerce Herbert Hoover proved unable to persuade the carriers to negotiate. The refusal angered Harding. By the fall of 1922, Harding had reversed his early stand. Frustrated by the unions’continued rejection of the RLB demands for wage cuts, the president placed the blame for the prolonged strike squarely on the shoulders of organized labor. By the late summer, he had embraced Attorney General Harry Daugherty’s position of the strike’s illegality and agreed that only drastic action could prevent the country’s transportation system from grinding to a halt. With presidential backing, Daugherty used a sweeping injunction to end the strike action, forcing compliance with the RLB wage cuts. The injunction, issued by Judge James Wilkerson of the District Court of Chicago on September 1, 1922, exceeded past judicial orders by prohibiting picketing and even minimal communications among the strikers and their supporters. The measure outraged many moderate 165

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Republicans such as Hoover, who had advocated a cooperative rather than confrontational solution to the strike. Faced with a hostile government and determined carriers, the unions had no choice but to return to work. Most unions followed the Baltimore & Ohio plan suggested by Hoover ally Daniel Willard, president of that railroad. The plan entailed negotiating with the companies on a separate basis in exchange for salvaging their seniority rights. In the wake of this massive confrontation, union members and moderate Republicans agreed hat The Railroad Labor Board created by the Rail- the industry needed a new way Labor Act was staffed by appointees of mechanism to cope with grievPresident Warren G. Harding, who held strong ances and disputes. The Special antilabor views. (Library of Congress) Committee Representing Railroad Labor Organizations prepared an initial report that outlined labor’s objectives in its relationships with the carriers. Union representatives turned this document over to Donald Richberg, who had earned a reputation as the leading labor attorney for his work in the 1922 strike. Charged with resolving the problems inherent in the carrier-union relationship, Richberg integrated these recommendations into his proposed legislation aimed at establishing new negotiating procedures. Richberg’s early drafts inevitably sparked controversy. The original proposal, known as the Howell-Barkley Bill, contained a provision that the carriers found particularly objectionable. It designated sixteen railroad labor organizations as specific bargaining agents for the rail employees. Acceptance of this condition would acknowledge carrier recognition of the unions, a position the railroad companies fiercely resisted. The two parties worked out a compromise, which President Calvin Coolidge signed on May 20, 1926. The final version of the act disbanded the RLB and substituted new procedures for settling disputes. As a first step, these included conferences between the two parties to iron out differences on wages, hours, and other 166

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items in the contract. If the parties remained deadlocked, an adjustment board, which would handle disputes over interpretation of the terms of a contract, assumed jurisdiction. The act was vague as to whether a national board (favoring the unions) or a systemwide board (implicitly allowing for company unions) would hear the grievances. The carriers seized upon the ambiguity of the act to maintain their employee representation schemes and bring grievances to systemwide boards. As late as 1933, 147 of the 233 largest carriers still maintained company unions that predated the 1926 law. The law included neither the means to enforce decisions nor the power to inflict penalties on guilty parties, therefore emboldening the railroad carriers. The weaker shopcraft and nonoperating workers proved most vulnerable to the company union strategy. A National Mediation Board was to intervene in disputes involving changes in a contract. The act required either party to provide a thirty-day prior notice before such changes went into effect. Once that period elapsed, the board would step in to negotiate a settlement. Arbitration stood as the absolute last choice of the board and occurred only if both parties agreed. If the mediation board perceived that the dispute endangered the transportation system, it could so inform the president, who could appoint an emergency board to deal with the crisis. The emergency board lacked enforcement power. The National Mediation Board’s course of moderation and accommodation contrasted sharply with the aggressive and hostile character of the RLB. The Railway Labor Act of 1926 established industrial peace throughout the railroad industry and acted as a model for other industries seeking accommodation between company owners and union advocates. Its recognition of collective bargaining as an employee right opened alternatives for workers throughout the economy who had no access to any form of bargaining procedure. Impact of Event The 1926 Railway Labor Act marked an important turning point in organized labor’s drive for recognition and the right to collective bargaining. It drew on earlier legislation such as the Erdman and Newlands Acts and would play a critical role in the formulation of the 1933 Bankruptcy Act, the 1934 amendments to the Railway Labor Act, and the 1935 Wagner Act. The Erdman Act of 1898 attempted to restore equality to the bargaining process between the railroad carriers and organized labor. The act applied only to operating employees—specifically engineers, firemen, conductors, and trainmen—yet it moved toward establishing mediation procedures that 167

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dealt fairly with unions. It banned the “yellow dog” contract, which threatened workers engaged in union activity with dismissal. The act also outlawed blacklisting, which permanently barred union supporters from employment through a system of files that carriers maintained on dissidents. A court test struck down these last two provisions. The 1913 Newlands Act sought to keep alive the negotiation process by setting up the U.S Board of Mediation and Conciliation, which again dealt only with the operating workers. World War I created an atmosphere more favorable to union demands. The urgency of continued production, the need for industrial peace, and the government’s desire to placate unions sparked administrative and legislative decisions that favored organized labor. Even before the declaration of war, the railroad unions had won the eight-hour day with the passage of the Adamson Act in 1916. During the conflict, the federal government assumed control of the nation’s rail system. The government promoted standard wages and hours, long favored by the rail unions, and ensured that union members remained free of discriminatory practices by the carriers. The unions found federal control far more in tune with their interests than was private ownership. The end of the war and the specter of company interests reclaiming their control worried the unions. Quickly, their representatives brought forth the Plumb plan, which outlined a scenario in which the unions, the bondholders, and the shippers exercised administrative control of the industry. Organized labor clearly wished to hold on to the gains made during the war and sustain what it perceived as favorable conditions. The war’s end proved disappointing to organized labor. Collective bargaining faced a sustained assault by carriers. Railroads pushed for open shops, in which workers did not have to belong to unions, and workers saw a resurgence of yellow dog contracts. The passage of the Railway Labor Act transformed the hostile environment that menaced the very existence of unions. The act salvaged the union goals first articulated in the Erdman Act and pursued through World War I. It revived collective bargaining and ended yellow dog contracts in the rail industry while guaranteeing the long-term survival of unions. Its success provided a model that greatly influenced subsequent legislation regarding labor relations through the mid-1930’s and acted as a beacon for pro-union forces in the economy. The revision of the 1890 Bankruptcy Law in June of 1933 demonstrated the continued influence of the Railway Labor Act. The Great Depression forced many railroads to the brink of ruin. Bankruptcy offered one alternative for troubled companies. It also opened the possibility of companies suspending all union contracts. To prevent such an action, the unions 168

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insisted on amendments that enabled the terms of the Railway Labor Act to prevail despite economic contingencies and secured the right to selforganization free from carrier intrusion. The Emergency Transportation Act of 1933, with a one-year life, reiterated these provisions. Designed to promote efficiencies and reduce waste in the industry, that act ensured that no workers would lose their jobs as a result of measures enacted under this law. In 1934, the unions sought permanent legislation to create a more stable workplace. Specifically, they intended to change the conditions that allowed company unions to persist in more than half the carriers. The 1934 amendments to the Railway Labor Act guaranteed employees the right to organize independent of carrier influence. The act also established a National Board of Adjustment, which acknowledged the unions as bargaining agents for the workers and created a new board of national mediation. The act gave the president the power to appoint members to this board, subject to congressional confirmation. The mediation board also exercised the authority to certify representatives from either side, a measure that preserved the autonomy of the unions. As important, workers had the right to select their representatives through secret ballots, which isolated them from company pressures. The success of the rail workers was illustrated most prominently in the formulation of the Wagner Act of 1935, which culminated a drive for collective bargaining throughout the economy. Already the National Industrial Recovery Act (NIRA) had incorporated boards of mediation and arbitration that had assumed a central role in the rail industry. Donald Richberg, who oversaw the writing of the Railway Labor Act, participated in the preparation of the NIRA, so similarities between the 1926 measure and the NIRA come as no surprise. The Wagner Act, or National Labor Relations Act, replaced the NIRA, which was found to be unconstitutional. It repeated many of the staples of the Railway Labor Act and its 1934 revisions. Company unions and yellow dog contracts fell by the wayside, and the law recognized the right of workers to organize free of company interference throughout all industries. Collective bargaining assumed a central role in labor-company relations. The Wagner Act, unlike the Railway Labor Act, acknowledged closed shops, in which workers had to belong to the union before beginning work. By the mid-1930’s, the unions had achieved their long-sought autonomy. Bibliography Babson, Steve. The Unfinished Struggle: Turning Points in American Labor, 1877-Present. Lanham, Md.: Rowman & Littlefield, 1999. Bernstein, Irving. The Lean Years: A History of the American Worker, 169

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1920-1933. Baltimore: Penguin Books, 1960. One of the most thorough accounts of labor’s activities in the 1920’s and early 1930’s. It provides a complete account of the railway union-carrier relationship and explains the positions of the participants in the 1926 legislation. Contains one of the best and most detailed descriptions of the various parts of the Railway Labor Act. _____. Turbulent Years: A History of the American Worker, 1933-1941. Boston: Houghton Mifflin, 1970. Chapters 5 and 7 discuss the amendments to the Railway Labor Act and the Wagner Act. The chapters pinpoint the influence of the original legislation in the formulation of national labor policy. One of the most thorough accounts available on the labor-company debates of the 1930’s. Breen, W. J. Labor Market Politics and the Great War: The Department of Labor, the States, and the First U.S. Employment Service, 1907-1933. Kent, Ohio: Kent State University Press, 1997. History of the federal government’s involvement in labor issues through the critical period from before World War I through the early years of the Great Depression. Contains a lengthy bibliography and an index. Fleming, R. W. “The Significance of the Wagner Act.” In Labor and the New Deal, edited by Milton Derber and Edwin Young. New York: Da Capo Press, 1972. A concise description of the various influences on preparation of the NIRA and the Wagner Act. Serves as a useful introduction to the debates of the era. Foner, Philip S. On the Eve of America’s Entrance into World War I, 1915-1916. Vol. 6 in History of the Labor Movement in the United States. New York: International Publishers, 1982. Provides a systematic description of labor conditions on the eve of World War I. Includes a succinct description of the legislative history of labor relations in the rail industry from the Erdman Act of 1898 through the Adamson Act of 1916. Jacoby, Daniel. Laboring for Freedom: A New Look at the History of Labor in America. Armonk, N.Y.: M. E. Sharpe, 1998. Keller, Morton. Regulating a New Economy: Public and Economic Change in America, 1900-1930. Cambridge, Mass.: Harvard University Press, 1990. Chapter 3 contains a brief discussion of the development of the federal government’s transportation policies from the beginning of the twentieth century through the 1920’s. Stresses the complexity of the rail industry, which is subject to the multiple influences of shippers, organized labor, manufacturers, and other interest groups. Indispensable for grasping the importance of regulation throughout society. Locklin, D. Philip. Economics of Transportation. 3d ed. Chicago: Richard 170

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D. Irwin, 1947. Chapter 12 lists all the relevant railroad legislation for the period, outlining each act in a concise fashion and providing the reader with a clear guide to its legal history. The description of the Railway Labor Act excludes comments on the ambiguity of the law that enabled carriers to maintain their company unions. Montgomery, David. The Fall of the House of Labor: The Workplace, the State, and American Labor Activism, 1865-1925. New York: Cambridge University Press, 1987. The most analytical and detailed description of labor relations in general, includes much information on the rail industry, particularly the activities of the operating unions and their role in the debates on national transportation policy both before and after World War I. Tomlins, Christopher L. The State and the Unions: Labor Relations, Law, and the Organized Labor Movement in America, 1889-1930. New York: Cambridge University Press, 1985. Chapter 4 traces the legal origins of collective bargaining, including brief descriptions of legislation in the rail industry. Vadney, Thomas E. The Wayward Liberal: A Political Biography of Donald Richberg. Lexington: University of Kentucky Press, 1970. Chapter 3 explains in detail Richberg’s role in the formation of pro-union railroad legislation. Provides a thorough account of Richberg’s motivations. Zieger, Robert H. Republicans and Labor, 1919-1929. Lexington: University of Kentucky Press, 1969. The best analysis of the influence of the Republican Party in shaping labor’s position in its relationship with the carriers. Particularly effective in explaining the reversal of the Republican Party from hostility toward the rail unions under President Harding and Attorney General Daugherty to the cooperative spirit promoted by Herbert Hoover under President Coolidge and embodied in the Railway Labor Act. Edward J. Davies II Cross-References Labor Unions Win Exemption from Antitrust Laws (1914); The NorrisLaGuardia Act Adds Strength to Labor Organizations (1932); The National Industrial Recovery Act Is Passed (1933); The Wagner Act Promotes Union Organizations (1935); Roosevelt Signs the Fair Labor Standards Act (1938).

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CONGRESS PASSES THE AGRICULTURAL MARKETING ACT Congress Passes the Agricultural Marketing Act

Category of event: Government and business Time: June 15, 1929 Locale: Washington, D.C. The Agricultural Marketing Act of 1929 established the Federal Farm Board to make loans to farm cooperatives and to control surpluses of farm commodities Principal personages: Herbert Hoover (1874-1964), the president of the United States, 1929-1933 Alexander Legge (1866-1933), the first chairperson of the Federal Farm Board Arthur M. Hyde (1877-1947), the secretary of agriculture under Herbert Hoover Charles McNary (1874-1944), a senator from Oregon, coauthor of the McNary-Haugen bills Gilbert Haugen (1859-1933), a representative from Iowa, coauthor of the McNary-Haugen bills Summary of Event In order to understand the impact of the Agricultural Marketing Act of 1929, it is necessary to understand what happened to the American farm sector early in the twentieth century. The second decade of the twentieth century was a good one for farmers. The world had experienced rapid industrial expansion, causing incomes and spending to rise. Demand for agricultural commodities had expanded, giving farmers high prices for their 172

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crops. Farmers in the United States were producing large crops and exporting large parts of them to foreign markets. A fixed quantity of good agricultural land caused land prices to go up, making farmers feel wealthier. There was no end in sight to the prosperity. Things began to change in 1919. European farmers were producing more as they recovered from World War I, and prices started to fall. In 1921, wheat and cotton were selling for half their 1920 prices, and farmers realized that hard times had returned. By 1923, agricultural commodity prices had started to rise slowly, and farm conditions began to improve. Things were getting better, but conditions for farmers still were unfavorable. Mechanization of farm work promised to help farmers by cutting production costs but was soon to contribute to problems of overproduction. Agriculture was an important sector in the United States economy in the early 1920’s, and Congress believed that help was needed for farmers, even though farm prices were edging up after the drastic drop in the early 1920’s. A major attempt to help was embodied in the five McNary-Haugen bills introduced in Congress from 1924 to 1928. These bills called for an export corporation, which would purchase agricultural crops in large enough amounts to keep their prices at acceptably high levels. These purchases were not to be sold domestically but were to be sold in foreign markets. The bills also called for an import tariff to discourage foreign farmers from sending agricultural goods to the United States to compete with domestic products. The first three McNary-Haugen bills did not pass Congress. The last two bills passed Congress but were vetoed by President Calvin Coolidge. Herbert Hoover, Coolidge’s secretary of commerce, was influential in advising Coolidge to veto the bills. The Agricultural Marketing Act of 1929 differed from these bills in that it focused on improved marketing as a means of aiding farmers. The government, under this act, would encourage formation of national cooperative marketing organizations but would not run them. As director of the Food Administration and as secretary of commerce, Hoover had participated in the many agricultural policy debates of the late 1910’s and the 1920’s. In 1928, he campaigned for president, promising to call a special session of Congress to deal with farm problems. Hoover had grown up on an Iowa farm and believed that an improved marketing process was the solution to the farm problem. Despite his strong feelings about the issue, once in the office of president he sent no specific legislation of his own to Congress, not wanting to interfere with Congress’ legislative prerogative. Even so, Congress had a good idea what Hoover wanted. It passed the Agricultural Marketing Act, which became law on June 15, 1929. The overall goal of the act was to put agriculture on an equal footing with 173

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other business sectors in the country. The objectives specified to carry this out were to decrease agricultural surpluses, stabilize prices for agricultural commodities and thereby cut down on speculation, and provide help in marketing of agricultural commodities. The act called for the establishment of the Federal Farm Board, which was to have a budget of $500 million. The Federal Farm Board was directed to set up national farmer cooperatives as a means of achieving its goals. These cooperatives were to be controlled by farmers and were to be used primarily to improve the marketing of crops. It was believed that the coming together of farmers into a comprehensive organization that could bargain on behalf of farmers would give farmers the power to prevent drastic price declines. The Federal Farm Board was authorized to make loans to the cooperatives to increase their size and efficiency. These loans could be used to build new facilities or for expenses of marketing agricultural crops. Farmers could obtain loans at low rates of interest. President Hoover persuaded Alexander Legge to leave his $100,000-peryear job as chairman of International Harvester to become the first chairman of the Federal Farm Board. Seven other board members were appointed, representing the major farm commodities. Arthur M. Hyde, as Hoover’s secretary of agriculture, was an ex officio member. By October of 1929, the Federal Farm Board had succeeded in setting up the Farmers National Grain Associations, which were stock companies in each of the major commodities. Stock in the associations was owned by the larger local grain cooperatives. The goal of each of these corporations was to become a large, centralized organization to facilitate marketing for the particular commodity it represented. It was hoped that their sheer size and the coordinaAs president of the United States, Herbert Hoover had primary responsibility for implementing the tion of the marketing process provisions of the Agricultural Marketing Act. (Li- they offered would increase the efficiency of marketing agbrary of Congress) 174

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ricultural crops, thus stabilizing prices at the desired high levels. The National Grain Associations were also supposed to control agricultural surpluses. Unfortunately, the government also had in place county extension agents, whose job was to help increase production. Getting farmers to control production was difficult, and the Federal Farm Board never succeeded in this task. The government thus, to some extent, operated at cross purposes, trying to keep prices high while also encouraging production. Impact of Event In 1930, the Federal Farm Board decided that its efforts were not succeeding. A surplus of major commodities kept agricultural prices low. Several factors contributed to the surpluses. The United States and Europe had had a few years of abundant harvests, and other countries were restricting imports from the United States and imposing tariffs in retaliation for the Smoot-Hawley Tariff of 1930. Farmers were particularly hurt by these retaliatory tariffs because they had long used exports as a means for eliminating agricultural surpluses. Finally, the Great Depression caused everyone to suffer. Low incomes meant that people were buying less of everything, including farm products. The surplus in wheat was particularly troubling. Wheat prices fell dramatically, and in response the Federal Farm Board set up Grain Stabilization Boards in February of 1930. The Grain Stabilization Boards hoped to control grain prices by encouraging farmers to reduce their output. Chairperson Legge of the Federal Farm Board and Secretary of Agriculture Hyde toured the country trying to get farmers to participate in the production control process. They were unsuccessful in getting farmers to cooperate with these programs, so the Grain Stabilization Boards started buying surplus wheat. The purchase program was intended to be temporary, as no one recognized that the Great Depression was going to last for many years. Grain prices continued to fall, and by 1931 farm incomes were at the lowest levels of the century. The Federal Farm Board decided that it could no longer afford to buy grain or to store the grain it had already purchased. Fearing that the grain already purchased would rot in storage, the Federal Farm Board began to sell the grain it owned. This had a further dampening effect on prices and enraged farmers. The public outcry against the sale was so large that Legge resigned as chair of the Federal Farm Board. The national cooperatives never emerged as the force that Hoover had hoped they would be. They were poorly managed and suffered from the same inefficiencies as the rest of the agricultural sector. They had little lasting effect on American agriculture, and most of them did not survive to the end of the 1930’s. 175

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The price stabilization portion of the Federal Farm Board’s efforts fared no better than did the national cooperatives. The Federal Farm Board found that it could not stop the slide in agricultural prices by buying surplus grains, as illustrated by the case of wheat. Not only did it fail to keep prices from going down, it spent $400 million in taxpayers’ money and disrupted commodity markets. Stabilization was a relatively new idea that was to be used in later legislation; some credit needs to be given to the Federal Farm Board for innovative thinking. Production controls similarly failed. Hoover thought that if farmers voluntarily cut back on production, surpluses could be eliminated. Legge and Hyde toured the country to try to get farmers to cooperate with this plan. Primarily because the plan was voluntary, farmers did not participate in it. The Federal Farm Board made a special report to Congress in late 1932 in which it stressed that farm policy should include a system that would control the acreage planted. Future farm legislation made this recommendation part of production control programs. Hoover did not recognize immediately that his farm plans were not working, so no adjustments to the plans were made during his presidential administration. His top farm advisers, Legge and Hyde, shared Hoover’s vision of how to help the farmers and so did not offer alternative plans. In Hoover’s defense, it is likely that the McNary-Haugen plans introduced in the 1920’s would not have fared much better. The onset of the Great Depression, coinciding with increased production made possible by the mechanization of farm production, made the Federal Farm Board’s goals nearly impossible to achieve. Hoover had high hopes for solving farm problems with voluntary participation by farmers. He had seen what had happened to farmers in the Soviet Union and did not want the government to intervene on such a large scale. Farmers did not choose to participate in Hoover’s plans, however, and even if they had, the low budgets available to the Federal Farm Board doomed the stabilization plans to failure. Congress became disenchanted with the Federal Farm Board and cut its 1932-1933 budget by 60 percent. Hoover lost the 1932 election, in which Franklin D. Roosevelt was elected president. Roosevelt had his own ideas about what should happen in the farm sector. He abolished the Federal Farm Board in 1933, effectively ending the influence of the Agricultural Marketing Act of 1929. In 1933, Congress passed the Agricultural Adjustment Act, which was the New Deal’s attempt to help farmers. By 1935, farm income was 50 percent higher than it had been in 1932. Key elements of the 1933 act were declared unconstitutional in January of 1936. Later that year, new farm legislation was passed. As was suggested 176

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by the Federal Farm Board, production controls were a key element in the new plans. Bibliography Benedict, Murray. Farm Policies of the United States, 1790-1950. New York: Twentieth Century Fund, 1953. A detailed discussion of farm policy, starting during the period when the United States was primarily an agricultural country. Useful for illustrating the fine points of farm legislation. Davis, Joseph S. On Agricultural Policy 1926-1938. Stanford, Calif.: Food Research Institute, 1939. A series of presentations and articles written during this time period. Not a systematic presentation, but interesting because of when it was written and because Davis was a Federal Farm Board economist. Hamilton, David. From New Day to New Deal. Chapel Hill: University of North Carolina Press, 1991. Focuses on the farm policies of the Hoover and Roosevelt administrations. Attributes the failed Hoover policies to the Depression as well as to misconceptions about the nature of the farm problem. Kirkendall, Richard. Social Scientists and Farm Politics in the Age of Roosevelt. Ames: Iowa State University Press, 1982. Shows how the events of the 1920’s, including the Agricultural Marketing Act of 1929, led to the farm policies of the Roosevelt Administration. Nourse, Edwin G. Marketing Agreements Under the AAA. Washington, D.C.: Brookings Institution, 1935. Has a short summary of the Agricultural Marketing Act of 1929 and goes on to show how the Agricultural Adjustment Act, the legislation that replaced the 1929 act, resembled legislation of the early 1920’s. Rasmussen, Wayne, and Gladys Baker. “A Short History of Price Support and Adjustment Legislation and Programs for Agriculture, 1933-65.” Agriculture Economics Research 18 (1966): 68-79. A short, insightful, nontechnical discussion of the Agricultural Marketing Act of 1929 and the agriculture programs that followed it. Tweeten, Luther. Foundations of Farm Policy. 2d rev. ed. Lincoln: University of Nebraska Press, 1979. A basic book for understanding farm policy. There is only a short section on the Agricultural Marketing Act of 1929, but the remaining material allows the reader to place the act in perspective. Eric Elder

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Cross-References The U.S. Stock Market Crashes on Black Tuesday (1929); The Banking Act of 1933 Reorganizes the American Banking System (1933); Eisenhower Begins the Food for Peace Program (1954); The North American Free Trade Agreement Goes into Effect (1994).

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THE U.S. STOCK MARKET CRASHES ON BLACK TUESDAY The U.S . Stock Market Crashes on Black Tuesday

Category of event: Finance Time: October 29, 1929 Locale: New York, New York The boom of the 1920’s ended in a dramatic crash of the stock market in late October, 1929, that signaled the beginning of the Great Depression of the 1930’s Principal personages: Herbert Hoover (1874-1964), the president of the United States, 1929-1933 Roger W. Babson (1875-1967), an economist who warned of a crash Irving Fisher (1867-1947), an optimistic economics professor Charles E. Mitchell (1877-1955), the president of the National City Bank Thomas W. Lamont (1870-1948), a senior partner at J. P. Morgan Richard Whitney (1888-1974), the vice president of the New York Stock Exchange Summary of Event October 29, 1929, “Black Tuesday,” is remembered as the most devastating day in American stock market history. Stock prices fell in a selling frenzy that began the moment the opening bell sounded. When the trading day was over, the Dow Jones Industrial Average had dropped more than thirty points, with some leading stocks plummeting $30-$60 a share. Billions of dollars of fortunes and the life savings of many small investors were wiped out as the decline of the market, which had begun in September, 179

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culminated on Black Tuesday. Few people had foreseen the coming of the Great Crash. The country had been riding on the boom of the 1920’s. The decade of the 1920’s is often called the “Roaring Twenties.” The American economy remained strong after World War I. Technological advances and mass production brought conveniences and a sense of prosperity to the average American family. With the advent of a new financial arrangement called the installment plan, the public could easily buy on credit such luxury items as automobiles, radios, vacuum cleaners, and electric iceboxes, all of which were just coming into widespread use. In his presidential campaign in 1928, Herbert Hoover promised “a chicken in every pot and two cars in every garage” and won the election in a landslide. Growing optimism and a sense of prosperity were reflected in the stock market. The 1920’s saw a broader participation of ordinary people in the stock market. As the glamorous lives of some successful stock speculators were publicized, many people became infected with the desire to make a quick fortune. Buying stocks was made easy by brokerage firms, which allowed customers to buy stocks “on margin,” paying a fraction of the total value in cash and borrowing the rest from the broker. As long as the stock price rose, this speculation was safe. If the price fell, however, an investor could get a “margin call,” meaning that more cash had to be put up to cover any further losses. If the money was not paid, the broker would sell the stock at the prevailing market price. Since stock prices were rising steadily in the 1920’s, many investors thought that buying stocks on margin was safe speculation. Many ordinary people who had little knowledge about investments became investors in the stock market. The stock market in the 1920’s, however, was dominated by a few powerful, wealthy investors. Some of them engaged in manipulation of stock prices, often using insiders’ information. They would first artificially inflate the price of a target stock, then, when other unsuspecting investors hopped on the bandwagon, sell the stock at a profit. Michael J. Meehan, for example, successfully manipulated the stock of Radio Corporation of America (RCA) in March, 1929, making $100 million in a week. In many cases, the surge in stock prices had to do with speculative momentum rather than with company profits. In fact, there were ominous signs in the American economy in 1929. The credit burden on consumers was heavy. Automobile sales were down. Steel production was falling. Few people were worried about these signs amid the increasing optimism, although some were concerned about the inflated stock investment. Economist Roger W. Babson, for example, predicted the coming of a crash in the stock market. Stock prices reached a record high on September 3, 1929, following a 180

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decade of steady increase. There was no sign of pessimism in the air. Few investors suspected that the day marked the peak of the bull market and that from then on stock prices would steadily decline, collapsing in October. The market began a long slide. Stock prices fell slowly but relatively steadily during the month of September. Tumbles in prices were often followed by small rallies. By the end of the month, the stock index hit its lowest mark for the year up to that point. This decline continued through the month of October. Fear and apprehension began to mount among both large and small investors, amid confusion and uncertainty. As margin calls went out, more and more investors had to scramble to cover their losses, often drawing from their life savings. Sales of stock when margin calls could not be met put further downward pressure on prices. Still, investors were consoled by sporadic upward movements in stock prices. There were some optimistic analysts as well. For example, Irving Fisher, a respected economics professor, dismissed the selling trend of the market as a “shaking out of the lunatic fringe.” He implied that eliminating marginal speculators would bring stability to the market. Stock prices, however, continued to decline. The stock market began to crash in heavy liquidation beginning on October 23. The price of General Electric stock, for example, fell $20 from the previous day, while Auburn Auto’s stock lost $77. By now, brokers and investors began openly to express their pessimism. Fear and anxiety prevailed. Few had any idea of what the next day, “Black Thursday,” would bring. Prices began to plummet at the opening bell on October 24. Thousands of investors had received margin calls the night before and had no choice but to sell their shares to cover their debts. The stock ticker carrying current stock price information began to run behind as the frenzied selling continued. Furthermore, price quotations printed on the ticker were confusing, as prices were tumbling in the double digits while the ticker tape showed only one-digit changes. Frustrated brokers scrambled to carry out their clients’ sell orders but were often unable to find buyers. At lunch time, Thomas W. Lamont, the acting head of J. P. Morgan, called several bankers in an attempt to control the situation. This so-called bankers’pool met and agreed to pour a large sum of money into the market to support stock prices in an attempt to avoid catastrophe. In the early afternoon, Richard Whitney, the vice president of the New York Stock Exchange, walked onto the exchange floor and in a loud voice began to place buy orders at prices higher than actual selling prices. He and other brokers representing the bankers continued this, going from post to post. The prices of major stocks immediately began to recover. In fact, by the time the market closed, many stocks had recovered some of their earlier losses. RCA stock, for example, closed at 181

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58¼, well above the lowest level of the day, recorded at 44½. The Dow Jones Industrial Average fell 6.3 points on a record trading volume of more than twelve million shares. The situation could have been much worse if the bankers had not supported stock prices. The market remained relatively calm on Friday and Saturday. Some prices rose slightly on Friday, and the Dow Jones Industrial Average was down only a few points in Saturday morning’s trading. Fear and anxiety, however, were building among investors over the weekend. When the market opened on Monday, October 28, prices began to drop at an accelerating speed. This time, there was no support from the bankers. The Dow Jones Industrial Average lost more than 38 points on a trading volume of more than nine million shares. The panic continued on the next day, Black Tuesday, when the bottom fell out of the market. The great bull market of the 1920’s had crashed. The crash would continue until mid-November of 1929. For the next two and a half years, stock prices would continue to slide.

Panicked investors crowd Wall Street as news of the stock market’s collapse spreads. (Library of Congress)

Impact of Event The stock market crash of 1929 was followed by the Great Depression of the 1930’s. Investors suffered massive losses. Many businesses and banks that had invested heavily in the stock market failed as a result of losses. The collapse in stock prices was followed by the banking panic of 1931. The crash was a harbinger of economic malaise that lasted through 182

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the 1930’s. National output plunged by 30 percent between 1929 and 1933, and the nation’s unemployment rate climbed to more than 24 percent. Although some have argued that the crash was a prime cause of the Depression, that claim is widely disputed. The Great Crash and the Great Depression may be only tangentially related. It is generally accepted, however, that the crash was caused in part by various abusive practices in the securities markets in the 1920’s including manipulation of securities prices, extensive speculation made possible by purchases on margin, trading by company officials using insiders’ information, and the sale of risky securities while withholding important information about them. The crash triggered a series of reforms in securities markets. At first, the Hoover Administration was reluctant to add federal regulations to the already existing state rules for the securities exchanges. Some people, particularly in the financial circle, feared that such measures would jeopardize the capitalistic mechanism in the financial markets. President Hoover hoped that Wall Street would reform itself in order to prevent future disasters. Many people argued, however, that strict measures to safeguard investors were necessary. In late 1931, the Senate voted to begin a major investigation of the securities markets in an attempt to unearth the manipulative practices in securities trading that were believed to have caused the crash. The hearings conducted by the Senate Committee on Banking and Currency lasted for two years and produced thousands of pages of testimony. The inquiry gave an impetus for Congress to pass several legislative measures to regulate the securities market on the federal level. When President Franklin D. Roosevelt took office in 1933, he closed the banks in an attempt to restore order in banking. The Emergency Banking Act of March 9, 1933, declared a bank holiday, and a program to reopen the banks was initiated. As part of the bank holiday, the New York Stock Exchange was closed from March 6 to March 14. The Securities Act of 1933 was based on the idea that the securities markets needed to be regulated by the federal government in order to protect investors. Underwriters of various securities were required to register new issues with the Federal Trade Commission before they could be offered to the public. The Banking Act of 1933, also called the GlassSteagall Act, gave more power to the Federal Reserve Banks in controlling member banks’ speculative activities. Furthermore, the act mandated that commercial banks separate themselves from investment functions in order to prevent them from using depositors’ funds for speculation. As a result, commercial banks were detached from the stock market by the mid-1930’s. The Federal Deposit Insurance Corporation was established to safeguard depositors and to avoid widespread bank failures. 183

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In 1934, Congress went one step further to regulate the securities markets. The Securities and Exchange Act of 1934 established a federal agency called the Securities and Exchange Commission (SEC) to oversee the securities markets and to enforce provisions designed to guard against manipulations and fraud. This legislation was much broader in scope than in the Securities Act of 1933, in that the Securities and Exchange Act regulated securities trading at any time, even after initial distribution, while the Securities Act dealt only with stocks and bonds at their initial offering stages. Every aspect of securities trading was addressed. The SEC began to enforce the margin rules set by the Federal Reserve System in order to regulate the buying of securities on credit. Broad provisions were established for the collection and transmission of information and for investigation of securities. Penalties for violators were also established. These new legislative measures brought sweeping changes in Wall Street practices, ensuring better market safeguards and procedures. Regulations prohibited stock manipulation using pool operations, or the combined powers of two or more operators. More stringent requirements were established for buying stock on margin. Underwriters of securities were obliged to disclose all important information about their issues. Limits were placed on the amount of speculation allowed by insiders in the stocks and bonds of their own companies. These and other measures helped the securities markets to recover in the years to come. The Great Crash had inflicted much pain on the nation, but the lesson learned from the experience was a valuable one. Even so, crashes could still occur, as illustrated by the drop in the Dow Jones Industrial Average of 508 points that occurred on October 19, 1987. Bibliography Beaudreau, Bernard. Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification. Westport, Conn.: Greenwood Press, 1996. Coben, Stanley, ed. Reform, War, and Reaction: 1912-1932. Columbia: University of South Carolina Press, 1972. A collection of forty-two papers. The last five chapters deal with the economy of the 1920’s, including the crash. Suitable for a general audience. Galbraith, John K. The Great Crash, 1929. Boston: Houghton Mifflin, 1955. A readable book that describes the dramatic days before, during, and after the Crash of 1929. Hiebert, Ray, and Roselyn Hiebert. The Stock Market Crash, 1929: Panic on Wall Street Ends the Jazz Age. New York: Franklin Watts, 1970. This book recounts events of September through November, 1929, in and 184

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around the New York Stock Exchange. Accessible to a general audience. Patterson, Robert T. The Great Boom and Panic: 1921-1929. Chicago: Henry Regnery, 1965. This book describes various aspects of the boom of the 1920’s and the stock market collapse. Human aspects of the crash and the Great Depression are also discussed. Accessible to a general audience. Sobel, Robert. The Big Board: A History of the New York Stock Market. New York: Free Press, 1965. A detailed history of the New York stock market from its birth to the early 1960’s. Suitable for a general audience. Wigmore, Barrie A. The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929-1933. Westport, Conn.: Greenwood Press, 1985. A detailed history of the stock and bond markets between 1929 and 1933. Political and economic influences on the securities markets are analyzed. Accessible to a general audience. Daniel Y. Lee Cross-References The Wall Street Journal Prints the Dow Jones Industrial Average (1897); The Banking Act of 1933 Reorganizes the American Banking System (1933); The Securities Exchange Act Establishes the SEC (1934); The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); The U.S. Stock Market Crashes on 1987’s “Black Monday” (1987); Dow Jones Adds Microsoft and Intel (1999).

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THE NORRIS-LaGUARDIA ACT ADDS STRENGTH TO LABOR ORGANIZATIONS The Norris-LaG uardia Act Adds Strength to Labor Organizations

Category of event: Labor Time: March 23, 1932 Locale: Washington, D.C. By curbing the use of injunctions in labor disputes, extending unions’ exemption from antitrust laws, and prohibiting “yellow dog” contracts, the Norris-LaGuardia Act made it easier to organize and operate labor unions Principal personages: George W. Norris (1861-1944), a United States senator from Nebraska, 1913-1943 Fiorello Henry La Guardia (1882-1947), a United States representative from New York, 1917-1933 Louis D. Brandeis (1856-1941), a United States Supreme Court Justice, 1916-1939 John L. Lewis (1880-1969), the president of the United Mine Workers union, 1920-1960 Summary of Event The Norris-LaGuardia Act of March 23, 1932, was passed in order to free labor unions from antiunion actions involving three related elements: the Sherman Antitrust Act, the injunction, and the “yellow dog” contract. As industry developed rapidly in the United States in the late nineteenth century, widespread efforts were undertaken to organize labor unions and to engage employers in collective bargaining. Many employers resisted these efforts. One instrument for such resistance was the Sherman Antitrust 186

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Act of 1890, which outlawed “every contract . . . or conspiracy, in restraint of trade or commerce . . . .” Union actions such as strikes and boycotts could be penalized through employer lawsuits for triple damages, as in the Danbury Hatters’ (Loewe v. Lawlor) case of 1908. Antiunion employers often were able to obtain court injunctions against union actions. An injunction is a court order primarily intended to forbid someone from taking actions that could cause severe injury to another. Courts had wide latitude in issuing injunctions. Violating an injunction could bring the offender under severe penalties for contempt of court, again with wide discretion for the court. Another antiunion instrument was the so-called “yellow dog” contract, whereby a worker was required, as a condition of employment, to explicitly agree not to join a union and to renounce any current union membership. Efforts by legislatures to outlaw such contracts had been overruled by the United States Supreme Court. A company whose workers had signed such contracts could seek an injunction against any union organizer who might try to persuade workers to breach their contracts. The Clayton Antitrust Act of 1914 ostensibly established the principle that the existence and operation of labor unions were not illegal under the Sherman Act. Further, the law forbade the federal courts to issue injunctions against a long list of union activities, vaguely worded but clearly referring to strikes and boycotts. Union jubilation that the Clayton Act would expand labor’s scope of organized activity was short-lived. In 1917, the Supreme Court held in the Hitchman Coal Company v. Mitchell case that issuing an injunction was an appropriate remedy against a union organizer trying to persuade workers to breach their “yellow dog” contracts. Even more striking was the Duplex Printing Company v. Deering case of 1921. The Duplex company had attempted to obtain court action against a system of union boycotts intended to force it to become unionized. Federal district and appeals courts refused to uphold the Duplex claim, but the Supreme Court overruled them in 1921. The decision held that the union’s actions could be in violation of the Sherman Act and did not constitute a “labor dispute” protected by the specific terms of the Clayton Act. Furthermore, issuing an injunction was appropriate to prevent harm to the employer. In a dissenting opinion, Justice Louis D. Brandeis pointed out that the majority opinion appeared to deny the intent of the Clayton Act. A strong antiunion trend persisted in Supreme Court decisions during the 1920’s. In 1921, the Court upheld use of an injunction against picketing when there were elements of intimidation and when “outsiders” to the direct dispute were involved, in American Steel Foundries v. Tri-City Central Trades Council. Also in 1921, the Court held unconstitutional an 187

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Arizona statute establishing the right to peaceful picketing in Truax v. Corrigan. The case of Bedford Cut Stone Company v. Journeymen Stone Cutters’ Association (1927) involved concerted refusal by union stonecutters to work on the products of a nonunion firm. The Court held that this action could be considered a violation of the Sherman Antitrust Act and that an injunction was an appropriate form of relief. In a vigorous dissent, Justice Brandeis pointed out the lack of parallel between the union activities and the business monopoly actions against which the antitrust laws were directed. The prosperous conditions of the 1920’s did not produce much union militancy; in fact, union membership showed a declining trend. After 1929, the economy headed into severe depression. As workers faced wage reductions, layoffs, or reduced hours, many perceived an increased need for the protection of union members and collective bargaining. Workers brought increasing political pressure to overrule the antiunion legal doctrines. In the United States Congress, their cause was taken up by Senator George W. Norris, a Republican progressive from Nebraska. With the aid of a panel of distinguished labor law experts, including Felix Frankfurter of Harvard Law School, Norris drafted a bill to achieve the intent of the Clayton Act. Fiorello Henry La Guardia of New York, also a progressive, introduced the bill into the House of Representatives. As the worsening depression created a sense of panic among many legislators who became eager to show concern for workers, the Norris-LaGuardia Act passed both houses of Congress by overwhelming margins and became law on March 23, 1932. Sections 3 and 4 of the law stated that contracts whereby workers agreed not to join a union were not to be enforced and could not be the basis for injunctions. Section 4 directed federal courts not to issue injunctions against concerted refusals to work (that is, strikes), joining or remaining in a union, giving financial or other aid to a union or strike, publicizing a labor dispute by picketing or other methods, or assembling peaceably to organize or promote a labor dispute. Further, such actions were not to be held to constitute violations of the antitrust laws. Section 13 gave a broad definition of a labor dispute, allowing disputes to involve persons other than an employer and his or her workers, thus broadening the range of union activities protected by the law. Section 6 provided that no union officer or member could be held liable for financial damages for the separate and independent actions of other union members or officers. Impact of Event The Norris-LaGuardia Act removed obstacles to the formation of unions and to their activities, particularly organizing, striking, and boycotting. The 188

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law did not commit the government directly to the promotion of unions. Such promotion, however, was soon forthcoming. After the election of 1932, Franklin D. Roosevelt’s New Deal swept aside the Republican administration and many Republican members of Congress, including La Guardia. One of the first acts of the New Deal was passage of the National Industrial Recovery Act (NIRA) of 1933. Its section 7a guaranteed workers the right to form and join unions of their own choosing and obliged employers to bargain with those unions. Similar provisions were contained in the Railway Labor Act of 1934. When the NIRA was held unconstitutional in 1935, Congress enacted the National Labor Relations Act (Wagner Act) of 1935. This affirmed a “right” to unionize and created the National Labor Relations Board (NLRB) to make this right effective. Whereas the Norris-LaGuardia Act merely protected union activities from damage suits and injunctions, the Wagner Act protected unions from a long list of “unfair” labor practices. These included employer interference with union organizing activities or union operations, discrimination against union members, and refusal to bargain collectively “in good faith” with certified unions. The NLRB was authorized to conduct elections to determine if a group of workers should be represented by a union. As a consequence of this legislation, much of the focus in labor relations shifted away from the private lawsuits with which the Norris-LaGuardia Act was concerned. Union organizers undertook vigorous campaigns for new members, sparked by the Congress of Industrial Organizations (CIO) under the leadership of John L. Lewis. Union membership, which had fallen below three million in 1933, passed ten million in 1941. Organizing efforts continued to meet with strong opposition, and employers still tried to enlist the courts to assist them, without much success. In 1938, the Supreme Court upheld the constitutionality of the Norris-LaGuardia Act in the case of Lauf v. E. G. Shinner and Company. The Court affirmed the legality of union picketing activities directed against a nonunion employer. In the case of Apex Hosiery Company v. Leader, the Supreme Court in 1940 refused to consider a union sitdown strike to be a violation of the antitrust laws. The case arose from a violent incident in 1937 when union members broke into the company’s plant and physically took possession of it. The Court noted that the union’s actions were clearly unlawful but argued that the appropriate remedies lay in channels other than the antitrust laws. In the case of United States v. Hutcheson (1941), the Supreme Court again refused to permit antitrust prosecution to be brought against union officials. The carpenters’ union that was the target of the lawsuit was trying to use a boycott to induce Anheuser-Busch Brewing Company to reverse a decision that certain work should be performed by machinists. It was a no-win 189

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situation for the company, since it could be similarly attacked by the machinists if it reversed its decision. The Supreme Court simply affirmed that the union actions should not be viewed as a violation of the Sherman Antitrust Act. The great spread of unionization in the late 1930’s helps explain why hourly wage rates in manufacturing increased about 30 percent between 1935 and 1941 at a time when more than 10 percent of workers remained unemployed. Some economists noted that while union workers were benefiting, their gains were raising business costs and thus slowing the rise of job openings for the unemployed. Union membership continued to increase during World War II, but developments led many observers to believe that unions held too much power. Strikes by coal miners led by John L. Lewis during the war were particularly damaging to the image of unions. In November, 1946, Lewis provoked a confrontation with the government, which was then nominally operating the mines under wartime legislation. A federal court issued an injunction against a work stoppage by the union and then imposed heavy fines on Lewis and the union when they did not comply. In March, 1947, the Supreme Court upheld the injunction, ruling that the Norris-LaGuardia Act did not apply when the government was in the role of employer. In 1945, the Supreme Court established that some labor union actions could be considered to violate the Sherman Antitrust Act, if the union acted in collusion with employers in a manner that promoted monopoly conditions in markets for business products. The belief that unions had gained too much power ultimately led to adoption of the Taft-Hartley Act in 1947. That act prohibited a long list of “unfair” practices by unions. By that time, many of the issues confronted by the Norris-LaGuardia Act had faded from significance. Under the protection of the Wagner Act, unions had been organized and certified in most of the areas in which workers wanted them. “Yellow dog” contracts had disappeared, and harassment of union organizers had diminished. A major consequence of the Norris-LaGuardia Act was to shift the bulk of litigation involving labor union activities to state courts. Picketing and related activities associated with strikes and other labor disputes often primarily involved state laws, local ordinances, and local police. Private business firms largely lost the opportunity to bring civil lawsuits to halt or penalize nonviolent strikes and other labor union activities. Bibliography Babson, Steve. The Unfinished Struggle: Turning Points in American Labor, 1877-Present. Lanham, Md.: Rowman & Littlefield, 1999. 190

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Bernstein, Irving. The Lean Years: A History of the American Worker, 19201933. Boston: Houghton Mifflin, 1960. First volume of two-volume history; see below. _____. Turbulent Years: A History of the American Worker, 1933-1941. Boston: Houghton Mifflin, 1970. Taken in combination, these two volumes provide an excellent detailed narrative of a colorful and dramatic period in labor history. Breen, W. J. Labor Market Politics and the Great War: The Department of Labor, the States, and the First U.S. Employment Service, 1907-1933. Kent, Ohio: Kent State University Press, 1997. History of the federal government’s involvement in labor issues through the critical period from before World War I through the early years of the Great Depression. Contains a lengthy bibliography and an index. Daugherty, Carroll R. Labor Problems in American Industry. Boston: Houghton Mifflin, 1941. An older college textbook that deals at length with all aspects of labor relations. Pages 880-918 present information on Norris-LaGuardia and many court cases subsequent to it. Gregory, Charles O., and Harold A. Katz. Labor and the Law. 3d ed. New York: W. W. Norton, 1979. Detailed but readable account of the legislation and court actions relating to unions. Chapter 7 focuses on NorrisLaGuardia and related litigation. Jacoby, Daniel. Laboring for Freedom: A New Look at the History of Labor in America. Armonk, N.Y.: M. E. Sharpe, 1998. Lieberman, Elias. Unions Before the Bar. New York: Harper and Brothers, 1950. Devotes a chapter apiece to twenty-six major court cases involving unions. Excellent background on the events. Summarizes litigation at all court levels. Limpus, Lowell M., and Burr Leyson. This Man La Guardia. New York: E. P. Dutton, 1938. A good review of La Guardia’s colorful career, including tenure as New York City’s mayor. Mason, Alpheus T. Brandeis: A Free Man’s Life. New York: Viking Press, 1946. This very detailed account of the life of a powerful liberal thinker and activist puts his Supreme Court role in a broad context. His labor dissents are particularly noted in pages 539-547. Norris, George W. Fighting Liberal. New York: Macmillan, 1945. Norris’ autobiography demonstrates the impressive array of liberal causes he supported. A chapter entitled “Yellow Dog Contract” gives a narrative of the evolution of the Norris-LaGuardia Act. Paul B. Trescott

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Cross-References Labor Unions Win Exemption from Antitrust Laws (1914); The National Industrial Recovery Act Is Passed (1933); The Wagner Act Promotes Union Organization (1935); The CIO Begins Unionizing Unskilled Workers (1935); The Taft-Hartley Act Passes over Truman’s Veto (1947).

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THE U.S. GOVERNMENT CREATES THE TENNESSEE VALLEY AUTHORITY The U.S . Government Creates the Tennessee Valley Authority

Category of event: Government and business Time: May 18, 1933 Locale: Washington, D.C. The Tennessee Valley Authority, a massive federal experiment, sought to upgrade the economies of seven southern states and curtail abuses by private power utilities Principal personages: Franklin D. Roosevelt (1882-1945), the president whose New Deal administration launched the TVA George W. Norris (1861-1944), a liberal senator who helped lay the foundations of the TVA Arthur E. Morgan (1878-1975), a hydraulic engineer, educator, and utopian who became the TVA’s first chairman Harcourt B. Morgan (1868-1950), a soil expert and a TVA director David Eli Lilienthal (1899-1981), a TVA director and its most influential chairman Summary of Event During the memorable first hundred days of his first administration, President Franklin D. Roosevelt, aware that the United States expected immediate action to combat the Great Depression, placed before Congress a series of reconstruction measures. One of these called for incorporation of the Tennessee Valley Authority (TVA). The TVA received congressional approval on May 18, 1933, and its three-person board of directors was confirmed on June 13, 1933. Of all Roosevelt’s early New Deal legislative 193

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President Franklin D. Roosevelt (behind microphone), Eleanor Roosevelt, and Arthur E. Morgan during an inspection tour of TVA projects in late 1934. (Tennessee Valley Authority)

initiatives, the TVA was closest to his heart. The president passionately believed in the rehabilitation of America’s farms and the restoration of its rural cultures as means of encouraging better social balance in a predominantly urban civilization. The TVA’s missions focused upon the economic and social underdevelopment of seven southern states, or portions of them, that formed parts of the Tennessee River watershed. Fourth among American rivers in the volume of water that it carried, the eight-hundred-mile Tennessee River drained an area of more than forty-one thousand square miles. Within a few years, the TVA became the country’s largest power utility and emerged as the Roosevelt administration’s most ambitious regional social experiment. It is doubtful that any other early New Deal legislative action, certainly no enduring one, elicited more reverential praise or loosed more bitter animosities than did establishment of the TVA. 194

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Proposed by President Roosevelt as “a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise,” the TVA as a semiautonomous federal corporation was charged with a variety of missions, foremost—and explicitly—the unified conservation and rehabilitation of a region’s intertwined human and physical resources. Attainment of this sweeping, almost visionary objective was contingent, as Congress demanded, upon the TVA’s successful pursuit of the specific practical objectives of flood control, navigation development, and the production of electric power. Growing out of these major responsibilities, if ancillary to them, emerged a number of other important activities such as soil conservation, forest and wildlife restoration, the provision and expansion of recreational facilities, fertilizer production, community and industrial development, air pollution control, control of aquatic weeds, coal and solar energy research, construction of dams and steam plants, environmental education programs, acquisition of uranium supplies, assistance to small coal operators, wildlife management, and woodland analysis. Fulfillment of these tasks was placed in the hands of the three people, technically the TVA’s “incorporators,” who constituted its board of directors. Presidential appointees subject to Senate approval, they served overlapping nine-year terms. They were virtually autonomous, free to function beyond the pale of regulations governing other federal bodies. They had no need to petition Congress for annual appropriations since TVA operating revenues came from commercial sales of power. Although administrative expenses were tied to the Bureau of Budget’s sanction and to the Treasury’s approval for any borrowing, the directors were left untrammeled otherwise by the rulings of state or federal utility commissions. Neither the hiring nor the management of personnel fell under civil service guidelines. The heads of private utilities, as well as many other business leaders, were appalled and angered by the power lodged with the TVA’s board, just as they would be by some of the board’s principal policies, which they soon decried as “creeping socialism.” Soon after their appointment, the first directors agreed among themselves to a division of labor. Arthur E. Morgan, the board’s first chairman, was charged with planning, overseeing the construction of dams, and formulating educational programs, duties for which he was well qualified. Morgan was an idealistic progressive, a thoughtful utopian who had served as a reform-minded college president. He had earned high repute, first in Minnesota, then throughout the Mississippi Valley, as a hydraulic engineer. Another director, Harcourt A. Morgan, an entomologist by specialization, was entrusted with agricultural plans and problems along with the production and distribution of badly needed chemical fertilizers. He was both 195

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prominent and respected throughout the South as a land-grant university educator and agricultural expert. David E. Lilienthal, thirty-four years old, was the youngest of the directors. Ambitious, brilliant, alternately ingratiating or ruthless as the occasion suggested to him, he would by 1941 become the most influential, the most controversial, and the most famous member of the board. Born in Indiana, a lawyer by profession and a progressive by persuasion, Lilienthal had developed political credentials as the reformist chairman of Governor Philip La Follette’s Wisconsin Public Service Commission. He undertook the planning and execution of the TVA’s power policies, seeing his tasks as revitalizing democracy in an impoverished region. The prologue to the careers of the two Morgans and Lilienthal had been written by Nebraska’s George W. Norris. Senator Norris, always a maverick, long had fought for the extension of federally sponsored public power. Before Roosevelt entered the White House, he had been defeated by three previous administrations. Pivoting his battles on the troublesome disposition of the federal government’s World War I power and nitrate facilities at Muscle Shoals, Alabama, Norris drafted and fought for the legislation that made the TVA possible. Impact of Event The threats posed, both philosophically and practically, to private utilities in particular and to American businesses in general by the TVA appeared to be clear ones. Asked by a reporter if the TVA was socialistic, President Roosevelt acknowledged that indeed it was. TVA was owned entirely by the federal government. Its directors were neither elected officials nor accountable to Congress or dependent on Congress for appropriations. They were almost invulnerable to normal political or public scrutiny. The TVA was entrusted with bringing not only electrical power but a wide range of other services to the people of a specific region, the functional bounds of which kept expanding. Seen in context with the dictatorial actions of Italy’s Fascist regime and its government-run corporate economy, Germany’s National Socialism, and the Soviet Union’s Stalinist brand of Communism, the TVA presented menacing prospects to those who believed in a free marketplace dominated by private enterprise. Fears of socialism were exacerbated after controversy erupted among the directors. The disagreements produced distinct shifts in the accenting of the TVA’s primary goals. The TVA’s first chairman, Arthur Morgan, in order to safeguard the comprehensive vision he entertained for the TVA, wanted straightforward, friendly cooperation with private power companies, notably with Wendell Wilkie’s Commonwealth and Southern Power 196

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Company. He wanted to sell TVA electricity to them directly. By choosing to avoid conflict, Morgan hoped to prevent a costly duplication of facilities. More important, he wanted to save the TVA from disaster by taking a pacific approach to its enemies and competitors while the TVA was snarled in litigation that threatened its existence. Eventually Morgan, a highminded man who in critical circumstances allowed his moral righteousness to emerge in baseless accusations against his colleagues’ integrity, lost their confidence as well as the president’s. Lilienthal emerged from this internecine struggle as the arbiter of the TVA’s power policies. They were strikingly different from Arthur Morgan’s. Lilienthal’s intent was to emphasize the TVA’s mandate to use its production of electric power as a yardstick against which the presumptively exorbitant rates charged by private utilities could be measured—and thereby reduced. Prior experience had nourished Lilienthal’s distrust of private utilities. Because they were often owned by Wall Street financial interests, they tended, in his estimate, to function by remote control, distant from the needs of the people or regions that they serviced. Rather than selling the TVA’s output directly to Commonwealth and Southern, to Alabama Power, or to lesser regional utilities, Lilienthal hoped to decentralize the distribution of electric power while increasing the number of outlets available to the TVA’s consumers. To accomplish this, he first tried to stimulate municipalities to construct and operate their own power facilities. Construction would be supported by federal loans, and operations would be encouraged by access to the TVA’s relatively inexpensive electricity. Lilienthal worked to secure this goal of decentralization by bringing other nonprofit organizations, such as farmers’ cooperatives, into the TVA net and by educating small industries and farmers about the advantages of cheap electricity, just one of the many benefits that the TVA afforded them. Underlying Lilienthal’s emphasis on such tactics lay his conviction that although the utilization of modern technology could not in itself make people better, it could help them improve themselves. Furthermore, when used under the guidance of an agency of their own government, namely the TVA, he believed that modern technology would bring renewed vitality to their perceptions of American democracy. The TVA, like many early New Deal programs, was swiftly brought to court by its opponents. It survived assaults on its constitutionality before the U.S. Supreme Court. It won a limited victory in 1936 in Ashwander v. Tennessee Valley Authority, a decision confirming the government’s right to build dams to serve national defense and improve interstate commerce. The government also could sell surplus power generated by its dams, as the 197

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Constitution granted to the federal government the right to sell property it had lawfully acquired. Two more sweeping decisions followed shortly thereafter. Several statechartered utilities complained that TVA-sponsored federal loans to municipalities for construction of their own power facilities confronted the private utilities with unfair competition and misappropriated tax dollars. These complaints were dismissed by the Supreme Court in 1938 in Alabama Power Co. v. Ickes. Similarly, mounting a more direct and potentially deadly attack, eighteen state-chartered utilities attempted to enjoin the TVA from the sale and distribution of electric power, charging that congressional uses of the commerce clause and war powers to justify the TVA were unconstitutional. The Supreme Court rejected the charges in Tennessee Electric Power Company v. T.V.A. in 1939, thereby effectively removing the TVA from constitutional challenge. By the 1940, the TVA had become a New Deal icon as well as one of the monumental testaments to the vision and practical achievement of liberal America. Its champions boasted that the TVA’s production of electric power had driven down the rates of private and state-chartered utilities to honest and competitive levels while directly and indirectly distributing affordable electricity to millions who were previously without it. In addition, they credited the TVA with controlling a complex regional water system, without precedents to guide it, through its thirty-three dams and its locks. They further lauded notable increases in the tonnage of barge traffic on rivers with navigation improved by the TVA. Pointing to still more dramatic results, they credited the TVA with saving a previously floodplagued region from the huge losses in lives and property that it once seemed fated to bear almost annually. They also cited evidence of the region’s agricultural and industrial gains following the TVA’s assumption of responsibility for rehabilitating the region. Others have been more critical of the TVA. Embarrassed by it, moderately conservative President Dwight D. Eisenhower and later President Richard M. Nixon wanted to sell the TVA’s major facilities to private enterprise. Utilities and other businesses continued objections to what they charged were the TVA’s subsidized power rates. By the mid-1980’s, costbenefit analyses of each of the TVA’s major activities had raised serious questions about the TVA’s asserted achievements. Many such studies concluded that all of the TVA’s claimed achievements in power production, flood control, navigation, and regional economic recovery resulted from complex factors that would have operated without government interference and without the cost of so many billions of dollars. More than six decades after the TVA’s establishment, politicians, conservationists, businesspeople, and academicians still saw the TVA as controversial. 198

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Bibliography Chandler, William U. The Myth of TVA: Conservation and Development in the Tennessee Valley, 1933-1983. Cambridge, Mass.: Ballinger, 1984. A clearly presented cost-benefit analysis of the TVA’s performance. Critical of the TVA. Seventeen tables, page and chapter notes, appendices, valuable index. Colignon, Richard A. Power Plays: Critical Events in the Institutionalization of the Tennessee Valley Authority. Albany: State University of New York Press, 1997. Ginzberg, Eli. New Deal Days, 1933-1934. New Brunswick, N.J.: Transaction Publishers, 1997. Lilienthal, David Eli. TVA: Democracy on the March, New York: Harper & Brothers, 1944. Intended for general readers, this is an idealistic, enthusiastic estimate of the TVA’s objectives and accomplishments by its chairman. Contains a map, a bibliography, and a good index. Informative and full of the spirit that guided the early TVA. McCraw, Thomas K. Morgan v. Lilienthal: The Feud Within TVA. Chicago: Loyola University Press, 1970. Describes the battle of conflicting visions and objectives. Notes, bibliography, useful index. Neuse, Steven M. David E. Lilienthal: The Journey of an American Liberal. Knoxville: University of Tennessee Press, 1996. Biography of one of the TVA’s most influential directors. Owen, Marguerite. The Tennessee Valley Authority. New York: Praeger, 1973. Clear, informative, and substantive praise of the TVA by an author who served the agency. Very brief bibliography, useful index. Schlesinger, Arthur M., Jr. The Coming of the New Deal. Vol. 2, in The Age of Roosevelt. Boston: Houghton Mifflin, 1958. A classic liberal narrative. Brilliantly written and informed. Part 5 is pertinent to the origins of the TVA. Page notes serve as a bibliography. Fine index. Well worth reading in its entirety. _____. The Politics of Upheaval. Vol. 3 in The Age of Roosevelt. Boston: Houghton Mifflin, 1960. Superb narrative. Chapter 20 deals with court challenges to the TVA. Wonderful historical work on a dramatic subject. Page notes function as a bibliography. Excellent index. Wilcox, Clair. Public Policies Toward Business. Homewood, Ill.: Richard D. Irwin, 1966. Superb for essentials on the TVA as a government authority and its effects on the business community. Clear basic presentation, objectively handled. Many page notes, excellent index. Clifton K. Yearley

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Cross-References The Teapot Dome Scandal Prompts Reforms in the Oil Industry (1924); The Banking Act of 1933 Reorganizes the American Banking System (1933); The National Industrial Recovery Act Is Passed (1933); The Securities Exchange Act Establishes the SEC (1934).

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THE BANKING ACT OF 1933 REORGANIZES THE AMERICAN BANKING SYSTEM The Banking Act of 1933 Reorganizes the American Banking System

Category of event: Finance Time: June 16, 1933 Locale: Washington, D.C. The Banking Act of 1933 established deposit insurance, regulated interest paid on deposits, prohibited underwriting of corporate securities by commercial banks, and restricted loans to buy securities Principal personages: Carter Glass (1858-1946), a former secretary of the treasury, a powerful member of the Senate Banking Committee Ferdinand Pecora (1882-1971), the counsel to the Senate Banking Committee and an original member of the Securities and Exchange Commission Henry Bascom Steagall (1873-1943), a congressman from Alabama, 1915-1943 Arthur Hendrick Vandenberg (1884-1951), a senator from Michigan, 1928-1951 Summary of Event Failure of hundreds of American banks each year in the 1920’s, and then thousands of them in the period from 1930 to 1933, dramatized the inadequacies of the existing banking and financial oversight system. Senator Carter Glass began pushing for reform of the system in 1931. The Senate Banking Committee, when it reported out the bill that became the Banking 201

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Act of 1933, explained that “a completely comprehensive measure for the reconstruction of our banking system” had been deferred. The purposes of the committee’s emergency bill were more modest: “to correct manifest immediate abuses, and to bring our banking system into a stronger condition.” The new law significantly amended the Federal Reserve Act (1913) and the National Bank Act (1864) and added the Federal Deposit Insurance Corporation (FDIC) to those agencies already regulating and monitoring the banking system. The collapse of the stock market, with share prices on average falling to one-sixth of their 1929 value by 1932, was blamed in large part on excessive loans to stockbrokers and, through them, to stock speculators. Generous credit to stock speculators had fueled the Wall Street boom in the late 1920’s. A major purpose of the Banking Act of 1933, signed into law on June 16 of that year, was to prevent the “undue diversion of funds into speculative operations.” Banks belonging to the Federal Reserve System (member banks) were forbidden to act as agents to brokers and dealers on behalf of nonbank lenders. The Federal Reserve Board, a presidentially appointed group that governed the Federal Reserve System, was to ascertain whether bank credit was being used unduly for speculative purposes. It could limit the amount of member banks’ loans that could be secured by stock and bond collateral. Member banks fostering speculation through their lending policies would be denied the privilege of borrowing from the Federal Reserve Bank of their district. Congress was concerned that businesses engaged in agriculture, industry, and commerce would be deprived of adequate credit. Most of the loans financing speculation in stocks and bonds had been made by banks in financial centers; there is no evidence that these banks turned down requests by business firms for short-term loans. Moreover, corporations could finance expansion through the sale of new securities. Commercial banks in the 1920’s began large-scale development of affiliates that dealt in securities. By 1930, these affiliates brought more than half of all new securities issues to market, in successful competition with established investment banks. Extensive hearings on affiliates’ practices conducted by Ferdinand Pecora, counsel to the Senate Banking Committee, generated negative publicity regarding abuses. One section of the Banking Act of 1933, often referred to as the Glass-Steagall Act (although this name was originally attached to the entire Banking Act of 1933), ordered the separation of deposit taking from investment banking activities within a year. Financial institutions had to choose to be either commercial banks or investment houses; investment banks could no longer accept deposit accounts and member banks could no longer underwrite securities issues of 202

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business corporations. Banks with national charters were, however, permitted to underwrite and deal in securities issued by all levels of government in the United States for resale to the investing public. Separation of commercial banking and investment banking was expected to contribute to the soundness of commercial banks and to increase the overall stability of the economy.

Worried depositors gather outside a New York City bank after it was closed in April, 1932. (National Archives)

There is little evidence to support the idea, which prevailed in 1933, that many bank failures were the result of the securities activities of affiliates. Many failures of small banks were blamed on the poor results of their securities portfolios, purchased on the advice of larger “correspondent” banks eager to promote issues held by their affiliates. As a result of this perception of blame, member banks were forbidden to invest in corporate stock. They could continue to buy corporate bonds for their investment portfolios, provided that those bonds were of investment, rather than speculative, quality. Senator Glass was convinced that banks should confine their activities to short-term lending to businesses. His belief in short-term lending stemmed from the fact that the deposits of banks were largely payable on demand. He believed that banks should not lock themselves into long-term 203

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loans when their deposits, the source of funding for loans, could be withdrawn quickly. Banks were believed to have taken on riskier loans and investments than in the past so that they could offer higher interest rates to their depositors (a situation believed to have recurred in the 1970’s and 1980’s). To encourage safer portfolios, Congress resorted to regulating interest rates. For deposits payable on demand, no explicit interest was allowed. The ban on interest was also intended to discourage interbank deposits with correspondent banks, with the funds going instead to local borrowers. Small banks, however, continued to hold deposits with correspondent banks. Rather than paying interest, the correspondent banks offered various services free of charge. The Federal Reserve Board set ceilings on the rates that member banks were permitted to pay on time and savings deposits. In 1935, the FDIC was empowered to do the same for all other insured banks. Regulation Q, issued by the Federal Reserve Board, established a ceiling of 3 percent as of November 1, 1933. The rate was well above what most banks paid. Congressman Henry Bascom Steagall was responsible for the deposit insurance provisions of the Banking Act of 1933. For fifteen years he had battled for the reform, which he saw as benefiting community banking, as it allowed the banking public to have confidence in the safety of deposits made in local banks. Senator Arthur Hendrick Vandenberg pushed for deposit insurance to take effect immediately, but President Franklin D. Roosevelt was opposed. As a compromise, a temporary plan covering the first $2,500 in insured accounts went into effect on January 1, 1934. In the meantime, infusions of capital strengthened the banks that were permitted to reopen after Roosevelt’s banking holiday from March 6 to March 13, 1933. Between 1920 and 1933, thousands of minuscule small-town banks failed. The Banking Act of 1933 imposed a $50,000 minimum capital requirement to open a national bank; the minimum had been $25,000. Capital for each branch of a national bank had to at least match that required for a one-office bank in the same location. To prevent unhealthy competition resulting from bank proliferation, the Banking Act of 1935 later tightened the requirements for a bank to obtain a charter. The FDIC stood ready to deny insurance if excessive competition threatened. Banks in the United States were overwhelmingly undiversified institutions doing business at a single location, and their fates were thus tied to the fortunes of local economies. To provide some banking services to localities in which banks had closed, states began to ease restrictions on branch banking in the early 1930’s. The battle for permission to operate branches 204

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was fought hard in state legislatures and in Congress. Federally chartered national banks were authorized in 1927 to branch in the same community as their head offices if the state in which they were located did not prohibit branching. The Banking Act of 1933 permitted branches beyond the headquarters community, so that national banks could branch to the same extent as allowed for state banks. Interstate branches remained forbidden. In 1922, the Federal Reserve Banks began to coordinate their purchases and sales of government securities (known as open market operations). The 1933 act placed open market operations under Federal Reserve Board regulation; the board could now disapprove policies recommended by the Federal Open Market Committee. Further, all relationships and transactions of the Federal Reserve Banks with foreign institutions were placed under control of the Federal Reserve Board. Both measures diminished the policy roles previously played by the twelve Federal Reserve Banks, particularly the powerful one in New York City. The 1933 act also, for the first time, gave the Federal Reserve System some authority over bank holding companies that owned shares in member banks. A bank holding company could avoid this supervision if control over a member bank was exerted without the need to vote shares. Involvement of the Federal Reserve System with bank holding companies remained limited. Impact of Event Exercise of authority over banking by individual states had led to a “competition in laxity” with federal regulators. Over the years, restrictions on national banks, under federal jurisdiction, had been eased in order to prevent them from switching to state charters and to encourage state banks to convert to national charters. Many states had weak or inadequate banking supervision. State banks failed at a much higher rate than national banks between 1920 and 1933. Supporters of states’ rights had succeeded in preventing a federal takeover of chartering, supervision, and regulation of all commercial banks. After the Banking Act of 1933, however, states had to share jurisdiction with the FDIC for nonmember banks covered by that agency’s insurance. States retained the power to decide policy on branch banking. Some persisted in prohibiting all branches, but more broadened the territory in which branching was authorized. In no case was interstate branching permitted. Deposit insurance, fiercely opposed by some bankers in 1933, became permanent with the Banking Act of 1935. Advocates hoped that deposit insurance would stimulate bank lending to the private sector as deposits increased. Bank deposits increased by more than 46 percent between 1934 205

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and 1939, surpassing the record 1930 total by more than $2.6 billion. Total loans, however, failed to increase significantly, reflecting the weak recovery of business investment spending and the timidity of bank lending officers. The FDIC had been organized in September, 1933. All member banks were required to join; solvent nonmember banks were also eligible. Banks paid an initial premium of .25 percent of insurable deposits. By the beginning of 1934, 87 percent of all commercial banks had joined the FDIC, and more than 96 percent of all deposits were covered. By the end of that year, 93 percent of commercial banks had joined, and 98 percent of deposits were covered. All but about 1 percent of applicant banks qualified for deposit insurance. To remain insured, nonmember banks were expected to become member banks by mid-1936. This deadline was first extended and then abandoned in 1939. A majority of American banks continued to be nonmembers, enjoying the lower minimum capital and lower reserve requirements demanded by many state charters as opposed to the requirements imposed by the Federal Reserve Board. The FDIC later proved successful in one of its goals, that of preventing a new wave of bank failures triggered by depositors’ fears. Even as hundreds of banks were forced to close in the 1980’s, depositors did not panic and rush to remove their funds. Ceilings on interest rates did not hamper the gathering of deposits by banks until the 1950’s. Thereafter, competition with other investment outlets that offered returns higher than those permitted under Regulation Q caused some hardships for banks. Interest rate regulations for time and savings deposits were eliminated in 1986. The separation of commercial from investment banking called for in the Banking Act of 1933 had already begun before the act was passed. The two leading American banks, Chase National Bank and National City Bank, announced plans to eliminate their affiliates in March, 1933. The Morgan investment banking business, sharply reduced by the Depression, was continued by several partners who left to form Morgan, Stanley & Company. The historic name of J. P. Morgan & Company now belonged to a commercial bank that became Morgan Guaranty Trust Company in 1959. Other large investment banks chose to eliminate their deposit-taking activities. The 1933 act began the process of diminishing the autonomy of the twelve Federal Reserve Banks and centralizing power in the Federal Reserve Board in Washington. The Banking Act of 1935 completed that shift. In many significant ways, however, the American banking system was unchanged by New Deal legislation. Major problems left unresolved in206

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volved the dual banking system of state and national banks, the division of responsibilities among federal agencies, and limited ability of banks to branch and thus to diversify their lending and deposit bases. The 1933 act also created some problems by failing to make deposit insurance premiums related to risk and by banning interest on demand deposits, making it more difficult for banks to get those deposits. Bibliography Benston, George J. The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered. New York: Oxford University Press, 1990. A well-argued case for the repeal of separation of the two types of banking. Burns, Helen M. The American Banking Community and New Deal Banking Reforms, 1933-1935. Westport, Conn.: Greenwood Press, 1974. Useful background material and a detailed exposition of the attitudes of bankers regarding proposals that led to the banking acts of 1933 and 1935. Chandler, Lester Vernon. American Monetary Policy, 1928-1941. New York: Harper & Row, 1971. A leading economic historian discusses banking issues as well as central bank policy. _____. America’s Greatest Depression, 1929-1941. New York: Harper & Row, 1970. Provides the economic setting of the era. Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton, N.J.: Princeton University Press, 1963. Masterful and comprehensive. Covers the banking collapse and legislation of the 1930’s in great detail, from a monetarist perspective. Ginzberg, Eli. New Deal Days, 1933-1934. New Brunswick, N.J.: Transaction Publishers, 1997. Kennedy, Susan Estabrook. The Banking Crisis of 1933. Lexington: The University Press of Kentucky, 1973. Carefully researched, authoritative treatment of events of the period after 1929 and measures to deal with the banking crisis. Klebaner, Benjamin J. “Banking Reform in the New Deal Era.” Quarterly Review (Banca Nazionale de Lavoro) 178 (September, 1991): 319-341. An analysis of the limited changes made between 1933 and 1939 in commercial and central banking. Krooss, Herman Edward, comp. Documentary History of Banking and Currency in the United States. 4 vols. New York: Chelsea House Publishers, 1969. Volume 4 contains the text of the Banking Act of 1933 and useful commentary by an eminent financial historian. Studenski, Paul, and Herman Edward Krooss. Financial History of the 207

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United States. 2d ed. New York: McGraw-Hill, 1963. Excellent, concise treatment of developments since 1789 by two leading experts. Westerfield, Ray B. Money, Credit, and Banking. New York: Ronald Press, 1938. The most comprehensive treatise of the period. Well written. A less-detailed second edition appeared in 1947. Wicker, Elmus. The Bank Panics of the Great Depression. New York: Cambridge University Press, 1996. Benjamin J. Klebaner Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); The U.S. Stock Market Crashes on Black Tuesday (1929); The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); Congress Deregulates Banks and Savings and Loans (1980-1982).

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THE NATIONAL INDUSTRIAL RECOVERY ACT IS PASSED The NationalIndustrial Recovery Act Is Passed

Category of event: Government and business Time: June 16, 1933 Locale: Washington, D.C. The National Industrial Recovery Act temporarily replaced the market system with a system of planning boards, under which labor and management would decide on wages, prices, and output levels Principal personages: Franklin D. Roosevelt (1882-1945), the thirty-second president of the United States Hugh S. Johnson (1882-1942), the first head of the National Recovery Administration Rexford Guy Tugwell (1891-1979), an economist and Roosevelt adviser Robert F. Wagner (1877-1953), the chief congressional sponsor of the bill William E. Borah (1865-1940), the leader of opposition to the bill in the Senate Clarence Darrow (1857-1938), a famous criminal lawyer, appointed by Roosevelt to head the National Recovery Review Board Summary of Event The National Industrial Recovery Act was passed by Congress on June 16, 1933, in an attempt to bring relief from the Depression by overhauling the way in which American industry was organized. The experiences of the War Industries Board during World War I had convinced many in Washing209

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As scenes such as these unemployed men lining up for bread during the early years of the Great Depression became more common, there were increasing calls for government intervention in the economy. (Library of Congress)

ton that it was possible to greatly expand production if the competitive system were replaced with a system of industrial cooperation, guided by government. By the spring of 1933, the severity of the Depression was such that even the U.S. Chamber of Commerce was urging the new administration of Franklin D. Roosevelt to expand government’s role in the economy. Rexford Guy Tugwell, an economist at Columbia University and a member of Roosevelt’s “brain trust,” had sketched out a plan for peacetime governmental direction of production through the use of industry codes in his book The Industrial Discipline and the Governmental Arts, published in early 1933. The National Industrial Recovery Act (NIRA) as sent by President Roosevelt to Congress on May 15, 1933, was divided into two parts. Title I closely followed Tugwell’s recommendations. It authorized a suspension of antitrust laws to allow management and labor in each industry to write binding codes specifying standards of fair competition. The National Recovery Administration (NRA) was established to administer the codes. Section 7a of Title I was aimed at securing the rights of labor by guaranteeing the right to collective bargaining and by including minimum wage and maximum hour stipulations. Title II of the bill established the Public Works Administration and appropriated $3.3 billion for the carrying out of public works. 210

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The bill was passed quickly by the House of Representatives with little dissent, but it ran into trouble in the Senate. Many senators feared that suspending antitrust laws would give industry free rein to fix prices and restrict output. A group led by Senator William E. Borah of Idaho attempted to amend the bill to preclude price fixing, but the bill’s Senate sponsor, Robert F. Wagner of New York, arguing that the drafters of the industry codes should be given maximum flexibility, was able to defeat the amendment. The Senate finally passed the bill on June 13, 1933, by a vote of forty-six to thirty-nine. Roosevelt signed the bill on June 16. Roosevelt chose Hugh S. Johnson to head the National Recovery Administration and decided to place the Public Works Administration under the control of Secretary of the Interior Harold Ickes. Johnson had had considerable relevant administrative experience serving as an aide to Bernard Baruch on the War Industries Board during World War I. Although Johnson appeared to have considerable authority to impose codes of fair practice on industry, he chose instead to attempt to obtain voluntary cooperation. He hoped to establish a system of industrial self-government not dissimilar to the European doctrine of syndicalism, although Johnson saw himself as building on the industry trade associations that had arisen and grown during the 1920’s. Johnson’s reliance on voluntary cooperation was reinforced by doubts about the constitutionality of the NIRA and fear that disgruntled industrialists might bring lawsuits against it. The process of writing codes took place largely in offices at the Department of Commerce, with NRA administrators mediating between delegations of owners and workers from each industry. The reliance on voluntary cooperation resulted in few codes being drawn up during the early months. In July, Johnson persuaded Roosevelt to agree to a stopgap proposal under which essentially every business in the country would adopt NRA standards on minimum wages and maximum hours immediately. Businesses in compliance with what was called the President’s Reemployment Agreement would be allowed to display a sign featuring the NRA’s Blue Eagle and the motto We Do Our Part. Gradually, NRA administrators began to hammer out the industry codes. By June, 1934, codes covering 450 industries with twenty-three million workers had been drawn up. The industry codes all included provisions establishing minimum wages and maximum hours and guaranteeing the collective bargaining rights of workers. Employment of children under the age of sixteen was also generally prohibited. Most codes specified minimum prices and otherwise attempted to restrict competition. Examples of restrictions on competition included production quotas, under which individual companies would be assigned a specified share of total industry output, which would itself be 211

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limited; restrictions on the installation of new machinery; and restrictions on the hours during which existing machinery could be operated. Supporters of the NIRA in Congress and in the Roosevelt Administration had always been ambivalent concerning the wisdom or necessity of allowing business to restrict output and fix prices. The ambivalence is evident in a parenthetical phrase included in the following passage from section 1, Title I of the act, where the purpose of the legislation is explained: “[The Act is] to promote the fullest possible utilization of the present productive capacity of industries, [and] to avoid undue restriction of production (except as may be temporarily required).” In practice, it became clear during the negotiations for drawing up the codes that industry saw output restrictions and price fixing as a quid pro quo for agreeing to the restrictions on wages and hours and guarantees of collective bargaining. Support for the NRA began to wane as it became clear to what extent the industry codes allowed the code authorities to replace determination of wages, prices, and output through the market with determination by administrative fiat. Support was also undermined by the mercurial and erratic behavior of Johnson as administrator. Responding to criticism, Roosevelt set up the National Recovery Review Board, chaired by attorney Clarence Darrow, to review the industry codes. Johnson was finally obliged to resign in late September, 1934. He was replaced as the administrative authority by a five-person National Industrial Recovery Board (NIRB). The NIRB, particularly under the influence of Leon Henderson, the NRA’s chief economist, attempted to scale back the regulation of smaller industries and to modify the price fixing and output-restricting provisions in existing codes. The original act was set to expire in June, 1935. In February, Roosevelt formally asked for a two-year extension. Privately, however, Roosevelt appeared to have been ready to abandon the NIRA as having done little to help economic recovery. Many in Congress were also skeptical. In the end, congressional consideration of an extension of the NIRA was rendered moot when the Supreme Court ruled in the case of Schechter Poultry Corp. v. United States (1935) that the NIRA was unconstitutional. The Court was unanimous in ruling that the act was an unconstitutional delegation of legislative authority to the executive branch and that the commerce clause of the Constitution did not allow the federal government to control the details of the operations of businesses that had only a slight involvement in interstate commerce. Impact of Event Following the Supreme Court decision, the vast apparatus of industrial codes and industrial authorities was rapidly dismantled. Congress pre212

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served the labor legislation embodied in the NIRA by passing the National Labor Relations Act (NLRA, popularly known as the Wagner Act), which actually went beyond section 7a of the NIRA in attempting to ensure fair labor practices. Under the NLRA, the National Labor Relations Board was set up to police labor relations. In the years since the demise of the NIRA, the law’s impact has been debated by economists and historians. Economists have generally viewed the NIRA as having retarded recovery from the Great Depression. Economists have tended to be critical of the industry codes for having artificially raised wages and prices and authorized—in fact, often promoted—output restrictions. Some historians have been kinder to the NIRA, inclined to view favorably the social consequences of the labor law reforms contained in the act. Arthur Schlesinger, for example, although conceding that the NIRA contributed little economically to the recovery, has argued that legislative sanction for maximum hours, minimum wages, and collective bargaining and against child labor would have been difficult to obtain any other way.

Editorial cartoon satirizing the proliferation of New Deal legislation in 1934. (Library of Congress)

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A careful analysis of the economic impact of the act has been carried out by Michael Weinstein, who argues that the codes had a substantial effect on wages and prices. The NIRA’s impact on wages resulted, first, from the enactment of minimum wage regulations that raised the wages of workers who previously had been earning below the minimum, and second, from increases in the wages of those who had been earning more than the minimum in order to restore previous wage differentials. Weinstein estimates that in the absence of the NIRA, average hourly earnings in manufacturing in May, 1935, would have been less than $.35 per hour, rather than almost $.60 per hour. The act resulted in higher prices as a result of its effect on wage costs and its encouragement of collusive behavior and price fixing. Weinstein estimates that in the absence of the NIRA, the price level in May, 1935, would have been more than 20 percent lower than it actually was. Higher prices reduced the purchasing power of the existing stocks of money and wealth. This resulted in lower levels of consumption than would otherwise have occurred. The lower real value of the money stock also resulted in higher interest rates than would otherwise have existed. These higher interest rates, in turn, retarded borrowing by businesses to finance new machinery and equipment and borrowing by households to finance houses and, to a lesser extent, automobiles, furniture, and other consumer durables. In fact, industrial production had increased, on a seasonally adjusted basis, by more than 50 percent between March and July, 1933, before the NRA had begun operations. During the operating life of the NRA, industrial production actually declined slightly. Perhaps most damning is the fact that from the time of the Supreme Court’s ruling in May, 1935, that the NIRA was unconstitutional until the end of that year, industrial production increased by almost 15 percent. Investment spending performed somewhat better during the NRA period. Spending by businesses on new machinery and equipment and new factories and office buildings rose more than 40 percent between the depressed second quarter of 1933 and the second quarter of 1935. This still left business investment spending more than 60 percent below its level in 1929 and further still below the level necessary if the economy was to return to full employment. Similarly, spending by consumers on new houses more than doubled during the time of the NRA, but residential construction remained more than 70 percent below its peak level of the late 1920’s. Peter Temin has provided an interesting argument that reinforces the view that the NRA retarded recovery from the Depression. Temin notes that there are a number of parallels between the course of the early years of the Depression in the United States and in Germany. After 1933, however, the 214

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paths of the two countries diverged economically. Germany experienced very rapid employment gains, while employment recovered only slowly in the United States. Temin argues that the recovery in Germany was spurred, in part, by the determination of the Nazis, who came to power in January, 1933, to hold down the growth of wages. In the United States, in contrast, the NRA acted to keep wages far above market-clearing levels. Although there are many striking contrasts between U.S. and German economic policy in the post-1933 period, Temin believes that differences in wage policies are central in understanding the differing pace of employment recovery in the two countries. The NRA effectively precluded the possibility that the large numbers of unemployed workers in the United States would be able to find jobs by competing on the basis of wage rates. Bibliography Filipetti, George, and Roland S. Vaile. The Economic Effects of the NRA: A Regional Analysis. Minneapolis: University of Minnesota Press, 1935. Explores in detail the impact of the NRA on the Minneapolis-St. Paul area. Although fairly short, it provides a revealing account of some aspects of the industry codes in operation. Ginzberg, Eli. New Deal Days, 1933-1934. New Brunswick, N.J.: Transaction Publishers, 1997. Hawley, Ellis W. The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence. Princeton, N.J.: Princeton University Press, 1966. Attempts to place the NIRA in the context of New Deal attitudes toward big business. Interesting discussion of the turn toward enhanced antitrust enforcement in the post-NIRA period. Lyon, Leverett S. The National Recovery Administration: An Analysis and Appraisal. Washington, D.C.: The Brookings Institution, 1935. At more than nine hundred pages, much too long for the general reader, but worth skimming for an interesting contemporary appraisal of the NRA. Completed in the spring of 1935, before the Schechter decision, when the future of the NRA was still in doubt. Rosenof, Theodore. Economics in the Long Run: New Deal Theorists and Their Legacies, 1933-1993. Chapel Hill, University of North Carolina Press, 1997. Examination of the New Deal and its theorists from the perspective of their impact on later years. Contains an extensive bibliography and index. Schlesinger, Arthur M., Jr. The Coming of the New Deal. Vol. 2 in The Age of Roosevelt. Boston: Houghton Mifflin, 1958. Chapters 6-10 provide a sympathetic treatment of the formulation and administration of the NRA by one of the best-known biographers of Roosevelt. 215

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Temin, Peter. Lessons from the Great Depression. Cambridge, Mass.: MIT Press, 1989. Chapter 3 presents Temin’s argument that the high wages resulting from the NRA retarded economic recovery in the United States. Contains references to fairly advanced economic theory, but the basic argument is easily understood. Tugwell, Rexford G. The Industrial Discipline and the Governmental Arts. New York: Columbia University Press, 1933. Contains Tugwell’s rationale for the sort of system embodied in the NRA codes. Reveals the extent to which confidence in the free market system had declined by 1933. Weinstein, Michael M. “Some Macroeconomic Impacts of the National Industrial Recovery Act.” In The Great Depression Revisited, edited by Karl Brunner. Boston: Martinus Nijhoff, 1981. A brief analysis of the economic impact of the NIRA. Relatively nontechnical, but some knowledge of elementary economics is presumed. Anthony Patrick O’Brien Cross-References The Banking Act of 1933 Reorganizes the American Banking System (1933); The Wagner Act Promotes Union Organization (1935); Roosevelt Signs the Emergency Price Control Act (1942); Truman Orders the Seizure of Railways (1946).

216

THE SECURITIES EXCHANGE ACT ESTABLISHES THE SEC The Securities Exchange Act Establishes theS EC

Category of event: Finance Time: June 6, 1934 Locale: Washington, D.C. The Securities Exchange Act of 1934 created a quasi-judicial administrative body, the Securities and Exchange Commission, with broad powers to regulate the securities markets and protect the public interest Principal personages: Franklin D. Roosevelt (1882-1945), the president of the United States, 1933-1945 Ferdinand Pecora (1882-1971), a Senate investigator who documented capital market transgressions Sam Rayburn (1882-1961), a congressman from Texas who cosponsored the Securities Exchange Act Duncan Fletcher (1859-1936), a senator from Florida who cosponsored the Securities Exchange Act Richard Whitney (1888-1974), an influential president of the New York Stock Exchange during the 1930’s Summary of Event The Securities Exchange Act of 1934 (Public Law 291) solidified the expanding role of the federal government in protecting the investing public. Passed in the aftermath of the greatest stock market collapse in history, this legislation established a new administrative agency with broad powers to ensure that many of the financial abuses and deceptive practices of the past would not recur. 217

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Historically, as economic activity increases in volume, complexity, and sophistication, the corporation emerges as the dominant form of business organization. Corporate entities thrive because of the continued and expanding capital investment of people willing to accept the risks and rewards of ownership but unwilling or unable to actually participate in management of the business operation. Through the issuance of securities by corporations, ownership can be spread over a broad base of individuals, thus maximizing the potential for invested resources. In order to facilitate this capital exchange process, organized marketplaces have developed throughout the world. These capital markets provide the mechanism for the corporate distribution of debt and equity securities as well as the subsequent transfer of these securities between individuals. Because of the inherent separation of corporate management from ownership, current and potential investors operate under a distinct informational disadvantage. Capital contributors are at the mercy of claims made by the “insiders.” Exploitation of unwary investors inevitably occurs, and securities markets merely serve to provide an organized forum within which to execute such schemes on a broad scale. Government, concerned with ensuring an adequate supply of available capital in order to sustain economic growth, has a natural interest in protecting investors and maintaining public confidence in these securities markets. In the United States, attempts at regulation of securities were first made at the state level. In response to widespread fraudulent activities of stock promoters, Kansas enacted a statute in 1911 to protect the public interest. In the first year following enactment of this law, approximately fifteen hundred applications to sell securities in Kansas were filed. Only 14 percent were accepted, the rest being judged fraudulent (75 percent) or too highly speculative (11 percent). Other legislatures followed Kansas’ lead, and by 1913, twenty-two other states had passed laws similar in intent but widely varying in approach. These state securities laws are often called blue-sky laws, since the speculative schemes they attempted to foil often involved little more than selling “pieces of the sky,” or worthless securities. For various reasons, the individual state attempts to regulate securities markets were not very effective. Perhaps the greatest problem arose from the tactic of “interstate escape.” Individuals or companies could continue deceptive and fraudulent practices merely by moving across state lines (physically or through the mails) to another jurisdiction where regulations were inadequate, poorly enforced, or perhaps even nonexistent. To limit such evasion, some form of federal intervention was needed. During the 1920’s, there was a veritable explosion in securities market 218

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activity. Small investors entered the market in numbers larger than ever before. National brokerage firms doubled the number of their branch offices and reported phenomenal increases in business. Despite the vigorous trading and investing activity, the strength of the market was quickly eroding as a result of a number of prevailing traditions. First, stock price manipulation was common. This was often executed by means of a manipulation pool, in which a syndicate of corporate officials and market operators join forces and, through a succession of equally matched buying and selling orders (“wash sales”) among themselves, create the false impression of feverish activity, thus driving up the price of the stock. At the height of this artificial activity, the stock is sold, huge profits are reaped by the syndicate, and the stock price then subsequently plummets. As an example of the success of this gambit, a pool formed in March, 1929, to trade in Radio Corporation of America stock operated for only a seven-day period and netted a profit of almost $5 million. The excessive use of credit to finance speculative stock transactions (that is, buying stocks “on margin”) was another tradition that undermined the stability of the market. An investment as small as $100 could purchase $1,000 in securities (with a 10 percent margin), and there were no limits to the level of credit a broker could extend to a customer. This practice effectively lured potential capital away from productive economic investment and toward mere market speculation. A third practice that hindered the efficient operation of the securities market relates to the misuse of corporate information by insiders. Corporate officials could withhold information, either positive or negative. By timing its release after they had already positioned themselves in the market, they could benefit from the price fluctuation when the news finally became public. The weight of these traditions finally culminated in the stock market crash of October, 1929. This was a financial earthquake of dramatic proportions. The aggregate value of all stocks listed on the New York Stock Exchange (the largest capital market in the United States, handling 90 percent of all stock transactions on a dollar basis) declined from $89 billion before the crash to only $15 billion by 1932. The economic depression that rapidly deepened following the crash was the worst economic crisis in U.S. history. In March, 1932, the Senate Banking and Currency Committee was empowered to investigate the securities industry. This inquiry was continued and greatly expanded in scope after the election of Franklin D. Roosevelt as president in November, 1932. Roosevelt had been on record since his tenure as governor of New York as being highly critical of various 219

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stock market activities. The 1932 Democratic national platform on which he ran explicitly called for federal supervision of securities transactions. Ferdinand Pecora served as legal counsel to this committee during its extensive investigations in 1933 and 1934. He compiled an impressive body of evidence concerning financial corruption and malpractice. Pecora personally elicited much of the damaging evidence from the most prestigious financial leaders of the time and was invaluable in documenting the need for securities regulation. For example, his investigation disclosed that of the $50 billion of new securities issued during the decade after World War I, half had proved to be worthless. With the passage of the Securities Act in 1933 (signed into law on May 5, 1933, soon after Roosevelt’s inauguration), the federal government finally entered the arena of securities regulation. This bill was championed in Congress by Representative Sam Rayburn of Texas and Senator Duncan Fletcher of Florida. The 1933 act is primarily a disclosure statute, concerned only with the initial distribution of a security. Although it was an important first step and forerunner to more ambitious efforts in securities regulation, this legislation failed to adequately address many of the practices in the capital market that contributed to the 1929 collapse. Fletcher and Rayburn once again introduced bills in Congress, based in large part on drafts written by investigator Pecora. At the time, there was significant and widespread opposition to stock market regulation. Government interference, it was argued, would likely upset the delicate workings of Wall Street. Richard Whitney, president of the New York Stock Exchange (NYSE), was at the vanguard of this resistance. Whitney organized a well-financed protest campaign and mobilized forces to defeat the proposed legislation. Overt threats were even made to relocate the NYSE to Montreal, Canada, which offered a less obtrusive regulatory environment. Intense lobbying efforts did result in some modifications of the original bills, but finally, on June 6, 1934, Roosevelt signed the Securities Exchange Act. Impact of Event The major provisions of the Securities Exchange Act deal with three broad areas of regulation in an attempt to prevent the abuses previously cited and thereby protect the public interest: full and fair disclosure, supervision of capital market practices, and administration of credit requirements. This act requires that all national securities exchanges register with and be subject to the regulations of the Securities and Exchange Commission (SEC), an administrative agency with quasi-judicial powers that was created by this legislation. The immediate result was the closing of nine 220

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stock exchanges that could not meet the new requirements, including a one-man exchange operating out of an Indiana poolroom. All corporations with securities listed on a national exchange must file detailed registration statements with the SEC and are required to disclose financial information on a periodic basis, in a form that meets standards. The SEC retains discretionary power over the form and detail of such disclosures. SEC also required periodic audits of these firms by independent accountants. This last requirement has had a dramatic impact on the growth and development of the accounting profession. Certified public accountants were effectively granted a franchise to audit corporations with publicly traded securities. There was a substantial cost involved in terms of increased risk exposure. By expressing an opinion on the veracity of financial statements filed with the SEC, the auditor becomes legally liable to third parties (including investors) who may subsequently be harmed by reliance on that information. In the area of actual market practices, the SEC had immediate and far-reaching impact. Because of the relative informational advantage that market participants have over the public, the SEC now closely scrutinizes their activities. Exchanges, brokers, and dealers must all register with the SEC and file periodic disclosure reports. Corporate insiders are subject to especially strict rules designed to prevent unfair profit-taking. Certain stock market manipulation schemes (for example, wash sales) were prohibited. In fact, any fraudulent, manipulative, or deceptive securities dealings, whether specified by the act or not, are prohibited for all market participants. The penalties for infraction include fines, imprisonment, or both. Finally, in the area of credit, the 1934 act authorizes the Federal Reserve System to administer the extension of margin credit in securities trading, with the SEC as ultimate enforcer. This important component of government economic and monetary policy was no longer to be left in the hands of individual brokers. The first commission was composed of a presidentially appointed fivemember bipartisan panel that included Ferdinand Pecora. Ironically, Pecora was passed over as chairman in favor of Joseph Kennedy, who the year before had participated in a pool syndicate operation. Since its inception, the SEC has progressed through a number of different phases. The first decade of operation was an innovative period in which the permanent machinery and procedures necessary to carry out the functions and responsibilities of the SEC were established. This period was also marked by a concerted effort on the part of the early commissioners to promote the agency to both the public and the business community as a powerful partner 221

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in the quest for honest financial activity, not as a mere enforcement arm of the government. It was during this early period that a philosophy of operation began to evolve. Rather than merely coercing compliance through enforcement actions, the SEC often adopted the policy of encouraging self-regulation within a framework of governmental constraints. By inspiring confidence in the laws that it administered, the SEC hoped to foster a heightened sense of social responsibility and ethics among the private sector, leading to development of self-monitoring systems. This pragmatic approach was perhaps most evident in the area of establishing accounting and reporting standards. Although the SEC had been empowered to develop and maintain standards and principles of accounting practice, it generally deferred to the accounting profession. Such concession did not occur automatically. The SEC first had to satisfy itself that the private sector’s system of establishing accounting and auditing standards had progressed to an acceptable level. The next twenty-year period was characterized by very little significant legislation or innovation. Investor confidence in the capital markets was generally high, and the SEC routinely carried on the mission that had been developed. Revitalization of the SEC came in the early 1960’s, after a rash of litigation related to the civil and criminal liability issues involved in inaccurate financial disclosures. Various amendments to legislation administered by the SEC followed. In the 1970’s, major legislation was passed to combat corporate bribery and other illegal business practices. During the 1980’s, the SEC was guided by a doctrine of facilitation. Major efforts to expand full and fair disclosure and to streamline and standardize reporting requirements demonstrated the SEC’s commitment to improving the efficiency of the flow of information and ultimately the flow of capital investment in the economy. Continuation of this tradition will likely ensure that the SEC remains a potent regulatory force in the mission of protecting the public interest. Bibliography Chatov, Robert. Corporate Financial Reporting. New York: Free Press, 1975. A scholarly, yet readable, study of the broad regulatory process and the various social and political controls used in public policy formation and implementation. The SEC serves as the focal point for this detailed analysis of independent regulatory agency behavior. De Bedts, Ralph F. The New Deal’s SEC. New York: Columbia University Press, 1964. Provides an interesting historical perspective on the origins of the SEC and a description of its early, formative years of operation. 222

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Offers a depth of coverage and understanding not normally found in writings on New Deal reforms. Relaxed narrative form. Ginzberg, Eli. New Deal Days, 1933-1934. New Brunswick, N.J.: Transaction Publishers, 1997. Pointer, Larry Gene, and Richard G. Schroeder. An Introduction to the Securities and Exchange Commission. Plano, Tex.: Business Publications, 1986. Designed as a supplemental text for undergraduate accounting students, this booklet is nontechnical and serves as a good, brief overview of the SEC for the general reader. Some historical perspective is provided, but the emphasis is on the SEC’s structure and operation. Previts, Gary John, and Alfred R. Roberts, eds. Federal Securities Law and Accounting, 1933-1970: Selected Addresses. New York: Garland, 1986. Rappaport, Louis H. SEC Accounting Practice and Procedure. 3d ed. New York: Ronald Press, 1972. An exhaustive reference work and guide to the broad range of financial reporting requirements of the SEC. Often very technical in presentation, a natural outcome of the inherent complexity of the subject matter. Provides numerous illustrative examples. Tyler, Poyntz, ed. Securities, Exchanges, and the SEC. New York: H. W. Wilson, 1965. Provides the general reader with background information essential to an understanding and appreciation of more complex writings in the area of investing, capital markets, and regulation. Contains reprints of short articles, excerpts from books, and other documents. An interesting compendium that is very readable. Jon R. Carpenter Cross-References The U.S. Stock Market Crashes on Black Tuesday (1929); The Banking Act of 1933 Reorganizes the American Banking System (1933); Insider Trading Scandals Mar the Emerging Junk Bond Market (1986); The U.S. Stock Market Crashes on 1987’s “Black Monday” (1987); Drexel and Michael Milken Are Charged with Insider Trading (1988).

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CONGRESS ESTABLISHES THE FEDERAL COMMUNICATIONS COMMISSION Congress Establishes the Federal Communications Commission

Category of event: Government and business Time: June 10, 1934 Locale: Washington, D.C. Following President Franklin D. Roosevelt’s desire to consolidate regulatory powers over communications, Congress created the Federal Communications Commission Principal personages: Franklin D. Roosevelt (1882-1945), the president of the United States, 1933-1945 Daniel C. Roper (1867-1943), the secretary of commerce Frank McManamy (1870-1944), the chairman of the legislative committee of the Interstate Commerce Commission E. O. Sykes (1876-1945), the chairman of the Federal Radio Commission Lionel Van Deerlin (1914), the chairman of the House Subcommittee on Communications Summary of Event The Radio Act of 1927 created the Federal Radio Commission (FRC), the purpose of which was to ensure that public interest, convenience, or necessity was served by radio broadcasting. The FRC had the central authority to grant licenses to radio stations. The FRC soon faced a regulatory nightmare. Radio broadcasters with long histories enjoyed a favored 224

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status that they vigorously fought to retain, many radio stations were broadcasting on frequencies reserved for Canada, and several unregulated amateurs had ventured into radio broadcasting. To add to these problems, the FRC had been created on a temporary basis, with authority for one year. As a result, its life had to be extended annually through a congressional renewal process that was used to impose restrictions on the FRC. For example, the Davis Amendment to the 1928 congressional renewal of the Radio Act severely restricted the FRC by requiring it to divide licenses and broadcast frequencies equally across five geographic zones. Although such congressional mandates elicited protests from President Herbert Hoover, the regulation of broadcasting remained in this unsatisfactory state until 1933, when President Franklin D. Roosevelt directed Daniel C. Roper, the U.S. secretary of commerce, to study radio broadcasting. In January, 1934, a committee chaired by Roper recommended that the communications-oriented regulatory activities of the FRC (radio frequencies), the Interstate Commerce Commission (telephone, telegraph, and cable), the postmaster general, and the president be consolidated into a single regulatory body. Extensive congressional hearings on this subject followed. Witnesses offering testimony included Frank McManamy, chairman of the legislative committee of the Interstate Commerce Commission, and E. O. Sykes, chairman of the Federal Radio Commission. As a result of the hearings, Congress enacted the Communications Act of 1934, which established the Federal Communications Commission (FCC). Congress directed the FCC to uphold the “public interest, convenience, and necessity” in regard to broadcasting, the same mandate that it had imposed on the FRC. This mandate had the potential to curb the free speech rights of broadcasters guaranteed by the First Amendment to the U.S. Constitution. For example, a central theme of the Communications Act was that the airwaves should serve the needs and interests of the public. As a result, broadcast licensees are expected to be “socially responsible,” a goal that has found expression in many FCC policies relating to broadcast media content. Such policies include the fairness doctrine, stipulating that opportunities be provided for expression of opposing viewpoints about any topic of public importance, and FCC policy statements on scheduling television programs for children. Such policies were applied only to the broadcast media context. In contrast, these policies would be construed as illegal censorship in a print media context. Court rulings have reconciled this apparent anomaly by perpetuating the view that government supervision of broadcast content is more acceptable than review of print outlets. This interpretation underscores complaints that the broadcast media enjoy less First Amendment protection than do the print media. 225

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A basic justification for the “socially responsible” orientation of broadcast regulations enforced by the FCC is that the right of the public to receive useful and unbiased information should outweigh the First Amendment rights of broadcast licensees to be free of government control over the content of broadcast material. According to this view, the broadcasting media are “scarce” because of the finite range of airwave frequencies available for licensing. In addition, the ability to reach mass audiences bestows substantial power on broadcast licensees that can be used to influence public opinion. Under these circumstances, some form of government control to ensure that broadcasts serve the public interest, as opposed to granting unbridled First Amendment protection to the broadcast media, was deemed appropriate.

The first president to understand the power of radio communication, Franklin D. Roosevelt won public support for his New Deal programs through regular “fireside chats” broadcast over the radio networks. (FDR Library)

Impact of Event The organizational structure of the FCC consisted of seven commissioners and several professional or middle-level staff personnel. Over the years, both these groups have substantially influenced the direction and thrust of 226

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FCC policies. Analysis has suggested that the education and occupational background of FRC and FCC commissioners were key variables that affected decisions in these administrative agencies. In contrast to the commissioners, who directly administer broadcast policy, FCC staff members influence policy matters indirectly by controlling the content and flow of information provided to commissioners prior to decision making. Broadcast regulation is an intensely political enterprise. Studies have also found that the political orientation of FCC commissioners has strongly affected FCC regulation activities. For example, the speeches of Commissioner Newton Minow in the early 1960’s reflected the political stance of the John F. Kennedy Administration toward enforcing stricter regulation of broadcast programming. In the 1980’s, under the leadership of Chairman Mark Fowler, the FCC reflected a deep commitment to follow President Ronald Reagan’s political philosophy that government should make regulations less intrusive. Although the FCC has played a significant role in administering broadcast regulation, its policies and actions have changed over time to accommodate the philosophies of elected officials. Because commissioners are political appointees and because the Communications Act requires that no more than four commissioners share a party affiliation, virtually every president has tried to select commissioners who agree with the administration’s philosophy and policy objectives, regardless of party identification. The following illustration shows how politically driven changes in FCC policy were instrumental in the evolution of a new form of commercial communication labeled “program-length commercials” or PLCs, also called “infomercials.” PLCs are commercials that usually resemble regular television talk show or documentary programs in both content and length. In the early 1970’s, the FCC expressed concern over broadcast of PLCs because they potentially subordinate programming in the public interest to programming in commercial interests. The commission launched two policy initiatives to outlaw PLCs. First, widespread concern over television advertising directed toward children led the FCC to stress the need for distinguishing between program content and advertising material. The FCC expressed concern over children’s shows that focused on particular toys, which sometimes were characters in animated shows. Second, the commission adopted a limit of sixteen minutes of commercial matter per broadcast hour. The FCC reversed this policy in 1984 by eliminating quantitative advertising guidelines for television broadcasting on the grounds that marketplace forces were adequate to regulate the level of advertising. As part of the broadcast deregulation effort launched by the Reagan Administration, the FCC rescinded its earlier policy banning PLCs. By underscoring 227

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the acceptability of PLCs, these developments also enhanced their popularity. As a result, PLC programming registered impressive growth in the late 1980’s and early 1990’s. The “infomercial” industry, which barely existed in the early 1980’s, accounted for an estimated annual sales volume of $750 million in 1992. Broadcast regulation in the United States is a dynamic and complex process, and the FCC is only one of the participants in that process. Other key participants include industry groups such as the National Association of Broadcasters (NAB), various citizens’ groups, the courts, Congress, and the White House. It is important to understand how the FCC is influenced by each of these participants. The NAB commanded substantial lobbying power until the mid-1960’s, and other organizations such as the Association of Maximum Service Telecasters, Clear Channel Broadcasting Service, and Daytime Broadcasters Association emerged as specialist lobbying groups. The broadcast industry has influenced FCC policies through successful lobbying efforts directed at Congress. This industry’s substantial political clout in Congress stems from its control over electronic media exposure, an important resource for politicians. Citizens’ groups also have influenced FCC activities. In 1966, a landmark decision by the U.S. Court of Appeals for the District of Columbia recognized the right of responsible civic groups to object to license renewal applications that were under the FCC’s consideration. In this instance, the Office of Communication of the United Church of Christ was allowed to challenge the license renewal of WLBT-TV in Jackson, Mississippi, because this broadcaster discriminated against black audiences. Groups such as the National Citizens Committee for Broadcasting and Action for Children’s Television actively sought to influence the FCC on policy matters relating to the content of broadcast material. During the 1960’s, several citizens’ groups sought to protest against and settle differences with specific broadcasters via petitions to the FCC requesting denial of license renewal for these broadcasters. In the 1970’s, the first black commissioner was appointed to the FCC at the urging of such groups, which also actively participated in congressional hearings to urge funding support for consumer group activities. Although the courts do not adjudicate every decision of administrative agencies such as the FCC, they generally influence policy-making. Effective policy formulation entails careful deliberation to ensure its ability to withstand any eventual judicial scrutiny. The continual threat of judicial review tends to have an impact on policies of the FCC even when these policies are not formally adjudicated. The Communications Act stipulates that appeals concerning FCC decisions on broadcasting licensing should be 228

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filed with the U.S. Court of Appeals for the District of Columbia Circuit and that the decisions of that court are final, except for review by the U.S. Supreme Court. Congress exercises substantial control over federal administrative agencies such as the FCC. The FCC has often been targeted for special congressional investigations. Investigations supervised by Congressman Oren Harris (D-Arkansas) in the early 1960’s provided insights into “payola” problems widely prevalent in the recording and broadcast industries and led to revisions in the Communications Act. Several powerful standing committees in Congress continuously review FCC performance and the adequacy of the broadcasting regulatory framework. This is accomplished through general oversight hearings and hearings designed to evaluate any germane proposed legislation. A 1981 decision by Congress to change the FCC’s status from a permanently authorized agency to one requiring congressional reauthorization every two years underscores the power of the standing committees, which ultimately have the authority to approve such reauthorization. Finally, Congress and the White House together influence the FCC through the nomination and confirmation process for commissioners. In addition, the White House Office of Management and Budget exercises authority through reviewing and revising the annual FCC budget. In 1976, Congressman Lionel Van Deerlin (D-California) proposed a major revision to the Communications Act. The motivation for the proposal was that the law had become antiquated because new technologies such as cable television had transformed broadcasting. Van Deerlin introduced a bill in 1978 proposing abolition of the FCC and its replacement with a Communications Regulatory Commission. This proposal was abandoned in 1979. In retrospect, the proposal was beneficial to the FCC because it pushed the agency toward major deregulation decisions involving the radio and cable television industries. Bibliography Krasnow, Erwin G., Lawrence D. Longley, and Herbert A. Terry. The Politics of Broadcast Regulation. New York: St. Martin’s Press, 1982. An authoritative account of the laws and policies that govern broadcasting in the United States. This work traces the history of both the FRC and the FCC and offers insights into the political factors that shaped their creation and growth. The arguments and perspectives offered in the book are forceful, thought provoking, and well researched. This work also includes five case studies on diverse topics including ultrahigh frequency television, commercials, and congressional efforts to rewrite the Communications Act during the 1970’s. 229

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Lichty, Lawrence. “The Impact of FRC and FCC Commissioners’ Backgrounds on the Regulation of Broadcasting.” Journal of Broadcasting 6 (Spring, 1962): 97-110. Suggests that factors such as the education, occupational history, and personal experience of commissioners affect policies. Robinson, Glen O. “The Federal Communications Commission: An Essay on Regulatory Watchdogs.” Virginia Law Review 64 (March, 1978): 169-262. A former FCC commissioner offers some rare and useful perspectives on the FCC. U.S. Congress. House. Committee on Interstate and Foreign Commerce. Federal Communications Commission: Hearings Before the Committee on Interstate and Foreign Commerce, House of Representatives, Seventy-third Congress, Second Session on H.R. 8301, a Bill to Provide for the Regulation of Interstate and Foreign Communication by Wire or Radio, and for Other Purposes. 73d Congress, 2d session, 1934. Contains verbatim transcripts of hearings on H.R. 8301. Williams, Wenmouth, Jr. “Impact of Commissioner Background on FCC Decisions: 1962-1975.” Journal of Broadcasting 20 (Spring, 1976): 244-256. Extends Lichty’s work on how the backgrounds of FCC commissioners have influenced FCC policy. Siva Balasubramanian Cross-References The Federal Trade Commission Is Organized (1914); The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); The U.S. Government Bans Cigarette Ads on Broadcast Media (1970); Cable Television Rises to Challenge Network Television (mid-1990’s).

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CONGRESS PASSES THE FEDERAL CREDIT UNION ACT Congress Passes the Federal Credit Union Act

Category of event: Finance Time: June 26, 1934 Locale: Washington, D.C. By establishing a federal credit union system, the Federal Credit Union Act of 1934 encouraged savings and made credit more available to people of limited means Principal personages: Roy F. Bergengren (1879-1955), the first manager of the Credit Union National Association Edward A. Filene (1860-1937), a Boston merchant and philanthropist who established and financed the Credit Union National Extension Bureau, which in 1934 became the Credit Union National Association Alphonse Desjardins (1854-1920), a legislative journalist who helped to organize the first legally chartered cooperative credit society in the United States F. Hermann Schulze-Delitzsch (1808-1883), a German urban cooperative credit founder Friedrich Wilhelm Raiffeisen (1818-1888), a German rural cooperative credit founder Arthur Capper (1865-1951), a Republican senator from Kansas and chairman of the committee that held hearings on the Federal Credit Union Act Summary of Event A federal credit union is a nonprofit, member-owned cooperative organized to encourage its members to put money into savings and to use these 231

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accumulated savings to make loans to members. It also has the function of educating members on how to manage their own finances. The federal government, through the National Credit Union Administration (NCUA), charters credit unions as corporations as well as supervising and insuring them. In order to generate and maintain a feeling of mutual responsibility, members of a federal credit union must have a common bond of employment, association, or residence. The members, with one vote each, elect a volunteer board of directors from the membership at an annual meeting. The board has authority to determine the maximum limits on loans and the interest rates to be charged. Interest rates tend to be favorable in comparison to those offered by other lenders because of the lower labor costs in volunteer organizations, lower losses on defaulted loans, and lower marketing costs. In addition to an unpaid board of directors, credit unions have officers who are generally unpaid or receive nominal salaries. The ratio of delinquent to outstanding loans in the early 1990’s stood at half that of federally insured commercial banks. Personal contact and personal credit judgments play a large role in keeping this ratio low. Two major marketing advantages are the bond of clients to the credit union through membership and the close proximity of clients, with the credit union often located at an employee’s place of work. Loans can be designed to meet the needs of individual members. Federal credit unions must comply with all federal consumer protection laws, such as the Truth in Lending Act (1980) and the Equal Credit Opportunity Act (1975). Deposits by members are in the form of shares in the credit union and are frequently made through payroll deductions. Each account as of the early 1990’s was insured up to $100,000 by the NCUA. Profits from lending money and other sources may be distributed to the members as dividends. The development of credit unions resulted from the needs of lower income groups. Prior to the existence of credit unions, there were a limited number of outlets for small savings or loans. In 1948, the first credit union was organized in Belgium. At the same time in Germany, F. Hermann Schulze-Delitzsch organized cooperative credit societies and developed the principle that the funds to be loaned to members would come from the savings of members. By 1880, about three thousand cooperative credit societies had been organized in Germany. Friedrich Wilhelm Raiffeisen also organized cooperative credit societies in Germany but put greater emphasis on unselfish service to the organization. By 1920, his model for the earliest credit unions was being used in most countries in the world. 232

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The credit union movement spread to the North American continent with the help of Alphonse Desjardins, a legislative journalist who was studying economic conditions in Europe in the late 1890’s. In 1900, Desjardins used ideas from the Schulze-Delitzsch and Raiffeisen financial cooperatives to establish the first cooperative bank, La Caisse Populaire (the people’s bank), in the city of Levis in the province of Quebec, Canada. Edward A. Filene, a wealthy Boston merchant and philanthropist, was influential in bringing credit unions to the United States. His interest in the subject resulted from extensive travel throughout the world. He convinced Pierre Jay, commissioner of banking for Massachusetts, to work toward establishing a cooperative credit society in that state. Jay asked Desjardins to assist in passing a credit union act in Massachusetts. The Massachusetts Credit Union Act, the first complete credit union act in the United States, was enacted in 1909. In the same year, in Manchester, New Hampshire, Desjardins helped to organize the first legally chartered cooperative credit society in the United States. Growth in the credit union movement was slow during the decade after passage of the Massachusetts act. By 1919, however, Filene believed that there was a sufficient number of credit unions to justify an organized move toward national legislation. He organized the National Committee on People’s Banks to spearhead this task. The development of credit unions was aided by favorable conditions during the 1920’s. General prosperity and development of new consumer goods resulted in higher savings by workers and greater demand for consumer credit. Three factors were necessary to expand the movement: legislation allowing the chartering (incorporation) of credit unions, education of the general public regarding the movement, and voluntary associations of credit unions at the state level to further expand the movement. To facilitate each of these, the Credit Union National Extension Bureau (which became the Credit Union National Association in 1934) was created and financed by Filene. He hired Roy F. Bergengren as manager and Thomas W. Doig as assistant manager. Bergengren had started as the managing director of the Massachusetts Credit Union Association in 1920. He used the extension bureau to promote enabling legislation authorizing credit unions and helped organize individual credit unions. The Great Depression had a favorable impact on the movement. In 1932, Congress authorized credit unions in the District of Columbia and allowed them to borrow from the Reconstruction Finance Corporation. By 1934, thirty-eight states had enacted credit union laws and more than twenty-four hundred credit unions were in operation. Bergengren became increasingly convinced that national legislation was 233

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necessary. He argued that a federal law would permit the organization of credit unions in states that had refused to pass such legislation; that there was some possibility that other states might repeal their credit union laws, as West Virginia had done in 1931; that a federal statute would be useful as a basis of organization in those states that had weak or defective laws; and that federal legislation should be complete before credit unions formed a national association. The culmination of the legislative efforts of the Credit Union National Extension Bureau came on June 26, 1934, when the United States Congress enacted the Federal Credit Union Act. The act provided for the chartering, supervision, and examination of federal credit unions by the United States government. The writers of the act tried to incorporate the best ideas from state laws. In the same year, Congress chose the Farm Credit Administration (FCA) to supervise credit unions because of its expertise in examining other types of financial cooperatives chartered by the U.S. government. Claude R. Orchard was appointed the first director of the Credit Union Section, FCA. More than eighty-seven hundred federal credit unions were chartered during the nineteen years he served as director. Also in 1934, Bergengren and Filene held a national meeting of credit union delegates that led to the development of the Credit Union National Association (CUNA). Impact of Event The most important impact of the Federal Credit Union Act of 1934 was the confidence it inspired in the American public regarding credit unions. Involvement by the federal government played a major role in the growth of credit unions, from almost 2,500 credit unions when the act was passed to 3,372 by the end of 1935. In 1937, Congress passed legislation prohibiting the taxation of federal credit unions except on the basis of real or personal property. This legislation further supported growth in the number of entities, which approached 8,000 by 1939. Individual credit unions were also growing at an impressive rate. By March, 1936, Armour and Company employee credit unions had more than 22,000 members, had $1.25 million in assets, and had made loans up to that date of almost $7 million. There were twenty-four credit unions among Sears, Roebuck and Company employees, with 7,982 members, and credit unions associated with the U.S. Steel Corporation had almost 23,000 members. A credit union served employees of the United States Senate. Another credit union at the studios of Twentieth Century-Fox had more than 1,000 members. Many employers considered a credit union to be an important fringe 234

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benefit, with the advantage of involving no necessary cost to them. Space for the credit union offices often was provided on the premises, perhaps at reduced cost. Payroll withholding both for regular savings and for installment collection of loans was another common service by employers. In 1935, CUNA’s national board of directors agreed to establish the CUNA Mutual Insurance Society. The society provided only borrowers’ protection insurance to credit unions at first, adding life insurance for officers and families associated with CUNA in August, 1936. At the same time, the society considered writing automobile insurance but took no action. By the end of 1936, 437 credit unions in thirty states were members of the society. A total of twenty-three thousand loans were insured, with a total coverage of $2,425,000. The reserves of the society for payment of claims amounted to $11,000. Deposit insurance did not begin until 1970. The Credit Union Modernization Act of 1977 and 1978 revised much of the Federal Credit Union Act of 1934. The new legislation extended loan maturities, expanded real estate and home improvement loans, authorized self-replenishing credit lines to borrowers, and standardized participation loans with other credit unions. It also made many other changes in the technical operation of credit unions that expanded lending and investment authority. The Financial Institutions Reform Act of 1978, as part of the Modernization Act, established the Central Liquidity Facility as part of the National Credit Union Administration. This organization added safety to credit union lending by providing liquidity for emergency needs. It was not intended to provide permanent financing. This legislation also restructured the National Credit Union Administration and set up a new administrative board with increased supervisory functions. The Depository Institutions Deregulation and Monetary Control Act was passed in 1980. This law affected credit unions directly by increasing deposit insurance coverage. It affected them indirectly by legalizing share drafts for banks and savings and loans, increasing competition for the credit union industry, which already offered share drafts. The act also required that depository institutions maintain some level of reserves with the Federal Reserve System. Most credit unions did not maintain these reserves because the requirement was not implemented for any institution with deposits of less than $2 million. The Garn-St. Germain Act of 1982 suspended the monetary reserve requirement for the first $2 million in reservable accounts. This act also gave credit unions more flexibility and authority to handle their own affairs, including greater freedom in mortgage markets. In general, all this legislation, combined with favorable regulatory changes, made credit unions more competitive with banks and savings and 235

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loans. The industry was permitted to use a greater variety of sources for both assets and liabilities, and a greater range of financial activities was allowed. The interest rates that credit unions could pay on savings and charge for loans were relatively free from government control. Finally, credit unions still enjoyed the political and economic benefits of being nonprofit organizations. Bibliography Bergengren, Roy F. “Achievement: United States.” In Credit Union, North America. New York: Southern Publishers, 1940. Gives a detailed summary of the growth of credit unions by state. _____. Crusade: The Fight for Economic Democracy in North America, 1921-1945. New York: Exposition Press, 1952. A detailed history of the credit union movement, written by the man who had the greatest influence in passage of the Federal Credit Union Act and growth of credit unions. Reads like an autobiography in parts. Includes a six-page photograph section of early crusaders and administrators in the movement. _____. CUNA Emerges. Madison, Wis.: Credit Union National Association, 1935. Summarizes the functions and operations of credit unions one year after passage of the Federal Credit Union Act of 1934. Discusses the organization of the Credit Union National Association (CUNA). The final chapter offers an interesting, almost philosophical, explanation of how credit unions can lead to a better society. Croteau, John T. The Economics of the Credit Union. Detroit: Wayne State University Press, 1963. Credit unions have many unique economic characteristics because they do not maximize profits as their sole goal. After analyzing data from credit union questionnaires, the author recommends ways to improve financial efficiency in large credit unions. Topics include reserves, liquidity, growth, and investment yields. Written to be comprehensible by noneconomists. _____. The Federal Credit Union: Policy and Practice. New York: Harper & Brothers, 1956. An analytical study of the growth, policies, and practices of credit unions on a national scale from 1934 to 1954. Provides statistics on assets and liabilities, operating costs, earnings, and dividends. Includes an interesting chapter on structural change and suggested improvement. Ginzberg, Eli. New Deal Days, 1933-1934. New Brunswick, N.J.: Transaction Publishers, 1997. Isbister, John. Thin Cats: The Community Development Credit Union Movement in the United States. Davis: Center for Cooperatives, University of California, 1994. 236

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Moody, J. Carroll, and Gilbert C. Fite. The Credit Union Movement: Origins and Development, 1850-1970. Lincoln: University of Nebraska Press, 1971. Traces and analyzes the history of credit unionism as a national social movement, with a focus on the founders and leaders. Detailed and comprehensive. Source of many of the statistics in this article. Pugh, Olin S., and F. Jerry Ingram. Credit Unions: A Movement Becomes an Industry. Reston, Va.: Reston Publishing Company, 1984. A comprehensive look at the growth of the credit union movement. Describes the structure of the industry, regulations, financial management, and role in the financial marketplace. Also discusses the future of the industry from an early 1980’s perspective, including likely effects of legislation of that era. U.S. National Credit Union Administration. Development of Federal Credit Unions. Washington, D.C.: Author, 1972. Focuses on the role of the U.S. government in the credit union movement. Explains the benefits of federal government participation in the movement. Also describes the Credit Union National Association, Inc. (CUNA) and organizations associated with it. Richard Goedde Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); The U.S. Stock Market Crashes on Black Tuesday (1929); Congress Passes the Consumer Credit Protection Act (1968); Congress Prohibits Discrimination in the Granting of Credit (1975); Congress Deregulates Banks and Savings and Loans (1980-1982).

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THE WAGNER ACT PROMOTES UNION ORGANIZATION The Wagner Act Promotes Union Organization

Category of event: Labor Time: July 5, 1935 Locale: Washington, D.C. The National Labor Relations Act (Wagner Act) of 1935, one of the most significant American labor laws, placed positive federal authority behind labor organizing and collective bargaining Principal personages: Robert F. Wagner (1877-1953), a New York labor reformer and principal author of the National Labor Relations Act Franklin D. Roosevelt (1882-1945), a reform president who helped guide national recovery from the Depression and supported prolabor legislation William Green (1872-1952), the leader of the traditionally organized American Federation of Labor John L. Lewis (1880-1969), a leader of the United Mine Workers and first president of the Congress of Industrial Organizations Charles Evans Hughes (1862-1948), the Chief Justice of the United States who rendered a key decision supporting the Wagner Act Summary of Event Passage of the National Labor Relations Act (the Wagner Act) on July 5, 1935, signaled the beginning of a national labor policy, a prolabor reform policy that the first administration of President Franklin D. Roosevelt, then preoccupied with the nation’s economic recovery, initially had not anticipated and about which it was ill informed. The Wagner Act was one of the 238

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most significant pieces of labor legislation ever enacted in the United States. Moreover, unlike the Norris-LaGuardia Act of 1932, which was prolabor in spirit and removed unions and their organizers from the danger of court injunctions, the Wagner Act actively placed that authority of the federal government behind economic coercions, such as strikes, believed to be essential to a vigorous and expansive labor movement. The Wagner Act also instantly provoked heated controversy both in the Senator Robert F. Wagner around the time he introranks of organized labor and in duced his National Labor Relations bill. (Library the boardrooms of many em- of Congress) ployers. The novel presumption of the Wagner Act was that the profound labor unrest from 1933 into early 1935—much of it attended by bitter strikes, violence, critical disruptions of interstate commerce (a factor vital to federal jurisdiction), and in some quarters fears of civil war—was largely attributable to employers’ general refusal to recognize organized labor’s conviction that collective bargaining was a prerequisite to union survival. The ability to organize unions that could bargain more equally with employers in regard to individual workers’ wages, hours, and working conditions was perceived not only as a necessity but as a right. Accordingly, the act carried into public law an explicit acknowledgment that employers, especially the nation’s giant corporations, enjoyed disproportionate shares of bargaining power relative to those of their employees. These imbalances were perceived to be large enough to allow employers to slash employment and wages almost at will, drastically reducing much of the nation’s purchasing power and thus contributing directly to the unprecedented and persisting Depression of the 1930’s. The act represented, therefore, the federal government’s mandate to redress the imbalance of power. Such were the assumptions and rationales confirmed in the act’s introductory section and mortised into its substantive portions, most notably in section 7. It was this section that guaranteed workers the right to selforganization, or the forming, joining, or assisting of union organizations, as 239

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well as the right to bargain collectively through their chosen union representatives and to collaborate in their efforts to achieve collective bargaining. The Wagner Act provided more than guarantees to labor. It further recognized the intense antiunion hostilities of corporate employers in the partially or entirely unorganized mass-production industries and consequently specified and prohibited practices that were deemed unfair to labor. Employers were prevented, for example, from interfering with, restraining, or coercing workers trying to exercise the rights extended to them by section 7. Similarly, employers could no longer with impunity interfere with the formation of unions or dominate their operations, nor could they contribute to unions’ support. Hiring or tenure policies could neither encourage nor discourage workers’ union membership. Workers involved in lawful strikes against employers’ unfair practices, moreover, had to be reinstated when reapplying for their jobs, even when employers had replaced them, and workers who struck for higher wages or other improvements in working conditions could claim reinstatement if they had not been replaced. The Wagner Act thus sought to end employers’ blacklists, “yellow dog” contracts under which potential employees had to renounce union membership as a condition of employment, lockouts, dual unionism, the corporate hiring of private armies or armed thugs, spying, and various other antilabor tactics. The new quasi-legislative, quasi-judicial National Labor Relations Board (NLRB) charged with administration of the Wagner Act was resurrected from the Supreme Court’s devastation of Roosevelt’s early New Deal legislation. The NLRB was created under the aegis of the National Industrial Recovery Act of 1933 (NIRA), itself designed to hasten economic recovery through the formulation of industrial-labor codes. The NIRA was declared unconstitutional by the Supreme Court’s decision in the famed Schechter case two years later. The old NLRB, established specifically to ensure collective bargaining under the NIRA’s section 7a, was abolished as well. The tenacity of the chairman of the old NLRB, Senator Robert F. Wagner of New York, proved the main force behind the NLRB’s re-creation. A German-American immigrant, Wagner had carved a brilliant career as a labor reformer, partly during Roosevelt’s incumbency as governor, in New York State’s roiling politics. Wagner brought the character and experience requisite to the launching of the new NLRB to a New Deal administration less uncaring than ignorant about the labor world and more concerned, at least before 1935, with engineering recovery through business. Formation of the NLRB embodied a dawning comprehension of the complexities of the American economy. That comprehension was based on 240

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perceptions of the growing inseparability of intrastate and interstate commerce, and it therefore incorporated Wagner’s and the administration’s elastic definition of what constituted interstate commerce. This implicit loose construction afforded the NLRB’s three directors their jurisdiction in overseeing and enforcing workers’ rights to collective bargaining and prohibiting employers’ unfair labor practices. These were the battlegrounds, as it transpired, on which the effectiveness and the constitutionality of the act were to be tested. Impact of Event Passage of the Wagner Act coincided with the massive unemployment of the Great Depression. Union membership, which in 1920 included 12 percent of the labor force, had eroded steadily thereafter, so seriously that by the advent of the Roosevelt Administration in 1933, unions could count only two million members, or 6.6 percent of the labor force. Several factors accounted for this decline. The conservative, employer-dominated governments and economy of the 1920’s were characterized in spirit and deed by effective antilabor campaigns, sometimes masked as patriotic suppression of communism. Changes in the complexion of the industrial world also contributed. Shifting structural and technological patterns in basic industries such as railroads, steel, and coal mining, along with the spread of mass-production enterprises in the automotive, appliances, chemical, tire and rubber, oil, trucking, longshoring, meatpacking, and textile industries, led to a greater concentration of unskilled and largely nonunion workers. In addition, with 40 percent of American children completing high school by 1930, the educational level of the workforce was undergoing dramatic alteration, bringing with it predominantly urban visions of democracy and fresh perceptions of individual rights. The traditional craft unionism that distinguished the American Federation of Labor (AFL), a federation of skilled workers’ unions, seemed increasingly ill suited to the needs of the largely unskilled workers of the 1930’s. In previous decades, unskilled workers had been all but precluded from joining the AFL crafts because of the nature of their occupations. AFL president William Green eventually did sanction inclusion of several industrial unions, which rapidly became the fastest growing in the AFL, but he did not aggressively recruit them. The outlook of the unskilled workers’ leaders differed from that of the AFL. In opposition to the AFL’s perception of government’s role in the economy—basically an eschewal of any role at all—the leaders of the unskilled, in general, were far more enthusiastic than their skilled brethren in calls for governmental intervention on labor’s behalf. 241

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These were just a few of the critical differences dividing labor’s house by the mid-1930’s. Almost simultaneously with enactment of the Wagner Act, they grew more serious because of the emergence of the Congress of Industrial Organizations (CIO), dedicated to the recruitment of unskilled labor as well as to vigorous political activism. Subsequent antipathies between the CIO’s leaders—among them the fiery United Mine Workers’ chief, John L. Lewis—and the AFL’s old guard, from whose camp the industrial unionists of the CIO had departed, left the labor movement as a whole without clear direction or coherent policy. Beginning almost instantly upon its enactment and continuing through the next decade, the Wagner Act successfully promoted its major objective of relatively free collective bargaining. The proof lay in the rise of union membership. The three million unionists of 1933 swelled to more than fifteen million by 1946, more than 22 percent of the labor force. The vast majority of the labor force was composed of unskilled or semiskilled industrial workers, previously shunned by the AFL. More revealing than these overall figures, however, were union gains in manufacturing industries. Barely one-fifth of manufacturing workers were bargaining collectively in 1935, but more than two-thirds were doing so in 1946. The AFL claimed nine million members by the end of this expansion. The CIO’s count came to an impressive six million members. Behind these statistics of rising union membership lay thousands of decisions rendered by the NLRB. During the ten years following the reestablishment of the NLRB, fifty thousand union representation elections were held under its auspices, while judgments were rendered on more than forty-five thousand union complaints about practices unfair to labor. Once unions were lawfully established, labor-management disputes no longer fell under the jurisdiction of the NLRB. The Wagner Act and NLRB nevertheless contributed significantly to removing violence from, and substituting democratic procedures for, the selection of workers’ union representation and thus their right to collective bargaining. On April 12, 1937, Chief Justice Charles Evans Hughes delivered the Supreme Court’s majority decision in National Labor Relations Board v. Jones & Laughlin Steel Corp., in essence proclaiming the Wagner Act constitutional. The act and the NLRB, along with “little Wagner Acts” in many states, were already engulfed in controversies. The NLRB was understaffed, underfunded, and ill prepared to cope with these disputes. With only a thousand employees, even with self-imposed restrictions on its business, it handled annually roughly seven thousand representational cases and fourteen thousand complaints on practices unfair to labor, which averaged a year and a half for resolution. 242

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Operation of the NLRB fell under different interpretations. These differences arose from confusion among employers and unionists, complicated by their traditional animosities, and differences in interpretation of the act’s jurisdictions and responsibilities. There were notable lapses in the drafting of the law. It said nothing, for example, about employer (rather than employee) petitions for union elections. The act likewise had no provisions for handling the harassment of one union by another, a serious matter given the sometimes heated competition for union membership by the mutually hostile AFL and CIO. What constituted a “bargaining unit” when industries or plants were divided between craft and industrial workers was unresolved. There were problems regarding whether bargaining should be by area, company, or plant. These problems and many more were made more vexatious both by immature union leadership and by inexperienced and resentful employers. The heart of the Wagner Act’s difficulties lay in its legal promotion of union activity and its prolabor bias. Official and popular sentiments soon shifted toward seeking greater balance between labor and management. Those sentiments led to amendment of the National Labor Relations Act in 1947 by the Taft-Hartley Act. Bibliography Galbraith, John Kenneth. The New Industrial State. Boston: Houghton Mifflin, 1967. This readable work covers unions from the Wagner Act through the early 1960’s in chapters 23 and 24. Intelligent and insightful. Few notes and no bibliography, but a useful index. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Millis, Harry, and Gordon E. Bloom. From the Wagner Act to Taft-Hartley. Chicago: University of Chicago Press, 1950. Readable scholarly analysis with good historical context on labor-government-employer interrelationships from the early 1930’s to 1947. Notes, bibliography, good index. Northrup, Herbert R., and Gordon E. Bloom. Government and Labor: The Role of Government in Union-Management Relations. Homewood, Ill.: Richard D. Irwin, 1963. Emphasizes key questions raised by the NLRA and NLRB in chapter 3. Notes, chapter bibliographies, notations of authors and cases cited, good index. Richberg, Donald R. Labor Union Monopoly. Chicago: Henry Regnery, 1957. A scholarly view of the imbalances between unions and employers resulting from the Wagner Act and other New Deal reforms. Notes, bibliography, good index. 243

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Schlesinger, Arthur M., Jr. The Coming of the New Deal. Vol. 2 in The Age of Roosevelt. Boston: Houghton Mifflin, 1958. Classic scholarly narrative of its subject with extensive, detailed discussion of pertinent politics and personalities associated with the Wagner Act and the NLRB. Wonderful reading. Detailed notes in lieu of bibliography. Extensive, valuable index. Wilcox, Clair. Public Policies Toward Business. Homewood, Ill.: Richard D. Irwin, 1966. Clear, detailed, and authoritative. Worth reading in its entirety. Chapter 32 gives an excellent context for the NLRA and NLRB. Very useful indexes of cases, names, and subjects. Clifton K. Yearley Cross-References The Railway Labor Act Provides for Mediation of Labor Disputes (1926); The Norris-LaGuardia Act Adds Strength to Labor Organizations (1932); The CIO Begins Unionizing Unskilled Workers (1935); Roosevelt Signs the Fair Labor Standards Act (1938); The Taft-Hartley Act Passes over Truman’s Veto (1947); The AFL and CIO Merge (1955); The Landrum-Griffin Act Targets Union Corruption (1959).

244

THE SOCIAL SECURITY ACT PROVIDES BENEFITS FOR WORKERS The Social Security Act Provides Benefits for Workers

Category of event: Labor Time: August 14, 1935 Locale: Washington, D.C. In passing the Social Security Act, the United States government took initial steps to ameliorate problems caused by old age, unemployment, and varied disabilities Principal personages: Franklin D. Roosevelt (1882-1945), the president of the United States, 1933-1945 Frances Perkins (1882-1965), a social reformer, the secretary of labor Edwin Witte (1887-1960), a professor of economics and an authority on social insurance Arthur Altmeyer (1891-1972), the assistant secretary of labor Summary of Event The Social Security Act of 1935 established federally sponsored old-age pensions and unemployment insurance as well as providing categorical assistance to the needy aged, dependent children of low-income mothers, and the blind. The legislation was long in coming and was bitterly opposed. Although its framers were familiar with foreign social security programs, this act was shaped by domestic circumstances. The legislation’s significance lies in its carving out of a new area of federal responsibility. Western Europe initiated social insurance in 1854 with Austria’s compulsory but limited program. In the 1880’s, Germany, led by Chancellor Otto von Bismarck, launched a broad program embracing workers’ acci245

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dent, illness, and invalidity insurance as well as old-age pensions. Around the turn of the century, Denmark, England, and Scandinavia adopted social assistance programs, some financed by general revenues. In the United States, limited steps were taken by a number of state governments. Between 1910 and 1915, thirty states enacted workers’ compensation laws. By 1931, seventeen states and Alaska were providing assistance to the noninstitutionalized needy poor. By 1933, twenty-six states had adopted old-age pension programs, although in almost all cases financial aid was minimal. Initial efforts at the federal level were motivated primarily by efficiency considerations. The Civil Service Act of 1920 established an impersonal mechanism, in place of reliance upon personal relationships, to retire older employees. The Railroad Retirement Act (1934) was enacted in response to the drastic downsizing of the industry that began in the 1920’s. The Supreme Court struck down the legislation in May, 1935, contending that it did not achieve the goals of efficiency and safety in the conduct of interstate commerce. Efforts to formulate a broader, federally sponsored safety net were thwarted by a longstanding preference for self-reliance and private philanthropy, the presumed linkage of long-term unemployment with personal frailties, and a commitment by virtually all the nation’s economists to keeping government interference in business to a minimum. Inexpensive burial and disability insurance, coupled with home nursing services provided by several large insurers, seemed an adequate security program for working-class families. The depth and duration of the Great Depression shattered deeply held beliefs. By 1932, one-fourth of the labor force was unemployed, and only fifteen percent of those employed were covered by retirement programs. In this changed environment, the moral underpinnings for social insurance legislation buoyed the growing conviction that only a national program could create an adequate safety net. Profound differences existed, however, concerning how far the net should extend, who should be included, and how it was to be financed. The legislation’s timing and character were affected by a range of seemingly radical proposals. Francis Townsend, a retired California physician, gained widespread support for his advocacy of a $200 monthly pension for all persons aged sixty and over, financed by a 2 percent sales tax. Senator Huey Long of Louisiana trumpeted a vague “share the wealth” scheme. Representative Ernest Lundeen of Minnesota introduced legislation establishing a national unemployment insurance system, to be financed by general tax revenues. In June, 1934, President Franklin D. Roosevelt appointed, through 246

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executive order, a cabinet Committee on Economic Security, with Secretary of Labor Frances Perkins as chairperson. The committee was charged with the task of recommending legislation that would enhance individual economic security. The same executive order established an advisory council, representing diverse interest groups, and a technical board, composed of government specialists in social insurance and chaired by Arthur Altmeyer, the assistant secretary of labor. Economist Edwin Witte was named executive director of the entire project. The Committee on Economic Security concurred with Roosevelt’s belief that an acceptable program must be self-supporting and should not be viewed as a plan to provide adequate retirement income. Employees would be expected to accumulate some personal retirement funds. Aware of Supreme Court thinking in striking down the railroad retirement legislation, committee members relied on congressional taxing power as a means of funding the program. This would ensure constitutionality. The committee’s final report, submitted on January 15, 1935, recommended a multifaceted program to include compulsory old-age annuities, to be federally administered; a voluntary plan of old-age annuities; and an old-age assistance program, to be funded by federal grants to states. Also recommended was a federal-state program providing assistance to widows and children of deceased workers. A federal-state unemployment insurance plan was advocated, as was an extension of the public health service. During public hearings held by the House of Representatives and the Senate, opposition to the proposed legislation was expressed by conservative groups, which warned of the destruction of individual initiative, and by liberal organizations, which contended that regressive taxation would be imposed on low-income workers who would gain inadequate benefits. In April, 1935, the House Ways and Means Committee reported out a bill, renamed the Social Security Act. It quickly passed the full House. Soon thereafter, a slightly different version passed the Senate. A conference committee reconciled differences, and President Roosevelt signed the bill into law on August 14, 1935. The act did not include all the recommendations of the Committee on Economic Security. Omitted were the voluntary pension program and the proposal for a state-administered system of health insurance. The legislation covered only workers in commercial and industrial occupations, omitting government workers and the self-employed. Impact of Event The business community was sharply divided on major social security issues. Confronted with the more radical Long, Lundeen, and Townsend 247

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proposals, spokespeople for some industries rallied behind the Roosevelt Administration’s measure. The advisory council included executives of large firms that lacked adequate pension programs; these executives perceived the advantages of a compulsory national system. Even as a supplement to private pensions, limited social security benefits would encourage employees to plan for retirement, making room for younger and potentially more productive workers. Moreover, retirement income would help stabilize the economy by providing a source of spending that was relatively constant over the business cycle. Chamber of Commerce spokespeople generally were favorable to the legislation, while representatives of the National Association of Manufacturers were opposed. The life and health insurance industry sponsored an amendment in the Senate that would permit the contracting out of private annuities. Opposition to this proposal centered on the conviction that insurers would skim off low-risk employees. The amendment failed in the Finance Committee but was introduced into the full Senate, strengthened by requiring that private annuity plans meet federal guidelines. The amendment was adopted but was lost at the conference committee level. Overall, business interests played a major role in shaping the legislation. Secretary of Labor Perkins, Witte, and administration officials initially opposed old-age insurance. It came to the fore as a retirement measure favored by business interests. Businesspeople believed that productivity would be enhanced by annuities large enough to induce the retirement of older workers and would eliminate from the labor market women and children who sought employment as a means of supporting elderly relatives. The Committee on Economic Security, sensitive to business concerns, resisted efforts to peg the normal retirement age above sixty-five. The act discouraged retirees from reentering the work force by placing a low limit on income that could be earned before pension benefits were reduced and by subjecting postretirement earnings to social security taxation. After surviving attacks by the conservative press and by the 1936 Republican candidate for president, Alfred Landon, the Social Security Act was upheld by the Supreme Court on May 24, 1937. In the decades following its validation, many changes to the legislation took place. One constant feature has been the contributory character of the program, insisted upon by President Roosevelt, who feared that in its absence workers might lose entitlement to benefits. Employees, however, never possessed a legally enforceable annuity, and Congress time after time altered costs and benefits. Between 1944 and 1950, Congress authorized the use of general revenues to pay benefits if necessary. In 1977, a proposal to rely on general revenues during periods of high unemployment was rejected by Congress. 248

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The first major change in the program took place in 1939 as a result of the rapid buildup of reserves, as contributions to the Social Security system exceeded benefits paid. Conservative legislators became alarmed by the prospect of a projected $47 billion surplus by 1980. They feared that availability of these funds would result in a government spending spree. Social Security Commissioner Altmeyer recommended expanding benefits. This solution, which sailed through Congress without significant debate, began pension payments in 1940 rather than in 1942, provided benefits to dependents and survivors, and enlarged the federal share of public assistance. Most significant, the system was converted from full reserve financing to a pay-as-you-go plan. Instead of funds being set aside to pay benefits later, current beneficiaries would have their benefits paid for by current contributions. During the administration of Dwight D. Eisenhower, Social Security became irrevocably interwoven into the nation’s social fabric. Health, Education, and Welfare Secretary Oveta Culp Hobby came to believe that because benefits were linked to earnings, Social Security did not undermine the free market system. Her successor, former Eastman Kodak executive Marion Folsom, was convinced that by integrating Social Security with private pensions, corporations could retire older workers more readily and thereby promote efficiency. During the 1950’s, the proportion of persons aged sixty-five or older who were eligible for Social Security benefits rose from 25 percent to 70 percent. In 1956, the minimum retirement age for women was dropped to sixty-two. That amendment was supported by representatives of the depressed Southern textile industry. Five years later, the retirement age for male employees was lowered to sixty-two. Both women and men who retired before reaching the age of sixty-five received reduced benefits. As part of the Great Society program during the Lyndon B. Johnson Administration, Medicare was added to the social security program. Medicare involved a compulsory hospital insurance plan as well as a voluntary program of supplementary medical insurance. Medicaid, a federal-state program for the medically indigent, was also enacted. In 1969, the Social Security trust fund for the first time became part of the nation’s unified budget rather than being accounted for separately. In years of trust fund surpluses, the true magnitude of the national debt was hidden. From 1935 until 1972, the federal-state system of old-age assistance and aid to the disabled remained structurally intact. In 1972, as part of the Richard M. Nixon Administration’s family assistance plan, the Supplemental Security Income system initiated the federalization of that system. In 1979, a special provision gave divorced people the same protec249

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tion as current spouses if they had been married for a minimum of ten years prior to divorce. This made the United States the only nation to pay benefits to former spouses. Substantive changes to the system were advocated in the 1980’s. Strong opposition arose to a proposed drastic reduction of benefits to people who retired at the age of sixty-two, and the proposal was dropped. Numerous cutbacks took place, especially to the Aid to Families with Dependent Children (AFDC) program. Student benefits for youths aged eighteen to twenty-one were phased out. A cap on disability benefits was established. In 1983, federal income taxation was imposed on half the Social Security benefits received by people with relatively high incomes. Self-employed persons were required to pay Social Security taxes equal to the combined employee-employer rate. The age at which full retirement benefits would be paid was raised in steps to sixty-seven, beginning in the year 2000. The U.S. Social Security program, although becoming more comprehensive and closely coordinated than those of many other nations, remained highly controversial. As economic growth replaced equity as a prime macroeconomic goal, some analysts argued that the programs had become too costly to maintain and were counterproductive to business and to the nation because of adverse effects on employment and investment. By the mid-1960’s, employers began preferring to pay overtime to existing employees rather than expanding the work force, because they did not have to pay into the Social Security system for workers who had exceeded an income threshold. By the 1970’s, the compulsory nature of the system was being condemned by younger employees, who anticipated a long-term shortfall of reserves and feared that they would not get back in benefits what they put in as contributions. Some critics contended that the system needed simplification. By the 1980’s, the high cost and inadequate coverage of health insurance became a subject of growing concern, even among those convinced that the old-age pension program was in sound condition. The implementation of a more equitable, comprehensive, and cost-effective health delivery system emerged as the most significant social insurance issue. Bibliography Ball, Robert M. Social Security, Today and Tomorrow. New York: Columbia University Press, 1978. A former commissioner of Social Security under three presidents provides a rounded overview of the system. Insightful treatment of such key issues as whether women and minority groups are treated fairly and how Social Security and private pensions interact. Contains a select bibliography and a thorough index. 250

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Bernstein, Irving. A Caring Society: The New Deal, the Worker, and the Great Depression. Boston: Houghton Mifflin, 1985. An extensively researched, well-written assessment of the 1930’s from labor’s vantage point. Includes a comprehensive discussion of the passage of the Social Security Act. Solid documentation and full index. Crafted by a leading labor historian, this is among the best single-volume studies of the period. Graebner, William. A History of Retirement: The Meaning and Function of an American Institution, 1885-1978. New Haven, Conn.: Yale University Press, 1980. Graebner depicts Social Security as a function of pragmatic macroeconomic and business considerations. Use of Columbia University’s trove of oral interviews led to new insights on the framing of the legislation. A scholarly, well-documented, interesting monograph. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Nash, Gerald D., et al., eds. Social Security: The First Half-Century. Albuquerque: University of New Mexico Press, 1988. Contains the proceedings of a conference of the same name held in 1985 to commemorate the fiftieth anniversary of that landmark legislation and to evaluate its impact. Contains valuable discussion by some of the people who shaped the program and thoughtful essays comparing social security mechanisms of various nations. Appendix of a chronology of significant events in social security from 1935 to 1985. Schottland, Charles I. The Social Security Program in the United States. 2d ed. New York: Appleton-Century-Crofts, 1970. A sound, succinct primer providing a survey of the evolution of the system. Notes and an index enhance its value to the general reader. Jack Blicksilver Cross-References The U.S. Stock Market Crashes on Black Tuesday (1929); Johnson Signs the Medicare and Medicaid Amendments (1965); The Employee Retirement Income Security Act of 1974 Is Passed (1974).

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THE BANKING ACT OF 1935 CENTRALIZES U.S. MONETARY CONTROL The Banking Act of 1935 Centralizes U.S. Monetary Control

Category of event: Finance Time: August 23, 1935 Locale: Washington, D.C. By centralizing monetary control, the Banking Act of 1935 assured businesspeople of a more stable and predictable economic environment and allowed longer-range planning Principal personages: Marriner Eccles (1890-1977), a banker and Federal Reserve System official Carter Glass (1858-1946), a congressman influential in passage of the Federal Reserve Act of 1913 and coauthor of the Glass-Steagall Act of 1932 Benjamin Strong (1872-1928), the governor of the Federal Reserve Bank of New York, 1914-1928 Eugene Meyer (1875-1959), the governor of the Federal Reserve Board, 1930-1933 Eugene Black (1898-1992), the governor of the Federal Reserve Board for fifteen months in 1933 and 1934 Summary of Event The Banking Act of 1935 (H.R. 7617) reorganized control of the U.S. monetary system, centralizing power in the hands of the Board of Governors of the Federal Reserve System and the Federal Open Market Committee. Prior to the act, each of the twelve Federal Reserve Banks that had been established by the Federal Reserve Act of 1913 had been freer to pursue policies of their own choosing. 252

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This lack of central control had the potential to create chaotic business conditions. Businesspeople could not be sure what credit policies the Federal Reserve Banks would implement. As a result, an entrepreneur could not predict confidently whether his or her customers would face an economic upturn and easy credit in upcoming months or instead be discouraged from purchasing because of an economic downturn that might be allowed or encouraged by the local Federal Reserve Bank. Furthermore, a business could unexpectedly find itself at a competitive disadvantage in relation to a rival in another city if Federal Reserve Banks differed in their monetary policies. These types of uncertainties made business planning and forecasting difficult. The Federal Reserve Act of 1913 had represented a desire to put knowledge of the economy and its monetary system to work. Its passage marked the first systematic attempt to influence the U.S. economy through monetary policy (governmental control of the national money supply and credit conditions). A committee of experts with specialized knowledge not commonly held by politicians would guide monetary policy. Concern about how to balance potential control of the monetary system for political purposes against domination of it by private banking interests led to a splitting of power between private bankers and the presidentially appointed Federal Reserve Board. The Federal Reserve Board could indirectly change interest rates charged by banks or change the amount of money available to lend, by recommending to the twelve Federal Reserve Banks that they change the interest rate on loans they made to banks or by recommending purchases or sales of government bonds and bills. The Federal Reserve Board made few recommendations of either type during its first twenty years. Instead, the chief executive officers, or “governors,” of the twelve Reserve Banks took independent control of monetary policy through the Governors Conference. That group made its own policy choices, then offered them to the Federal Reserve Board for ratification. The Federal Reserve Act of 1913 did not provide for this conference; its unauthorized action was indicative of private banks’ reluctance to yield to central control. In addition, the individual Federal Reserve Banks were free to ignore recommendations of the Federal Reserve Board. The New York Reserve Bank in particular acted independently. Its governor, Benjamin Strong, also acted as a powerful leader among the officials who set monetary policy for the system as a whole. Strong’s death in 1928 left the system without commanding leadership. Following the 1929 stock market crash, the New York Reserve Bank favored buying government bonds from banks to provide purchasing power to the economy. It acted on this policy, but Strong’s 253

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successor was unable to persuade the rest of the Federal Reserve System to follow along. The Depression might have been far less severe if he had. Between the stock market crash and the banking holiday declared by President Franklin D. Roosevelt in 1933, the Federal Reserve Banks operated essentially independently, according to the beliefs of their own boards of directors. The Federal Reserve Board was weak and divided in opinion. The Open Market Investment Committee (an authorized body that replaced the Governors Conference in 1923), with one member from each Federal Reserve Bank, was similarly powerless. Each bank’s representative came to meetings with directions from the bank’s board of directors, and those banks rarely were unified in their goals. The decentralized control in the period from 1929 to 1933 led to monetary policy that has been described as inept and as possibly worsening the Depression. The Banking Act of 1933 set up the Federal Open Market Committee (FOMC), as successor to the Open Market Investment Committee, to determine appropriate bond sales or purchases for the Federal Reserve System. The FOMC also had one member from each Reserve Bank. It instituted all policy actions, and the Federal Reserve Board had only the power to approve or disapprove. Reserve Banks remained free not to participate in any open market operations recommended by the FOMC. System officials blamed inadequate powers, rather than misuse of powers, for their inability to stop the Depression’s economic contraction and to prevent bank panics and failures. Furthermore, many system officials were willing to tolerate the bank failures, seeing them as proper punishment for poor management or excessive earlier speculation in financial markets. The failures were concentrated among smaller banks and those that were not members of the Federal Reserve System, so they were of relatively little interest to the larger banks with the most influence in the system. The larger banks, in fact, saw the failures as a way of shaking their small competitors out of the market. In response to the behavior of the Federal Reserve System in the 1920’s and early 1930’s, Marriner Eccles, a banker and Treasury Department official, devised a plan to correct what he saw as flaws in the monetary control system. He and many others believed that better use of monetary policy could be a powerful tool to end the Depression. Some argued that improper use of monetary policy had exaggerated the economic downturn and that, therefore, less rather than more central control was indicated. Eccles, however, wanted to implement the powers of the Federal Reserve System more broadly and to establish conscious centralized control of the monetary system. Eccles’ proposals formed the basis for Title II of the Banking Act of 254

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1935, which stirred strong debate in Congress. Senator Carter Glass, who had helped develop the Federal Reserve Act of 1913 and had coauthored the Glass-Steagall Act of 1932, particularly opposed changing the nature of the system. It was argued that a stronger Federal Reserve Board would become an arm of the political administration rather than providing independent judgment. These debates led to rewording the act to reduce control by the executive branch. The act reorganized the central bodies of the Federal Reserve System. The Federal Reserve Board was renamed the Board of Governors of the Federal Reserve System, and the secretary of the treasury and comptroller of the currency were dropped from membership. Each of the board’s seven members was to be appointed by the president, but their fourteen-year terms would overlap, so that no single presidential administration could appoint a majority. The FOMC was reconstituted to include all members of the Board of Governors and five presidents of Federal Reserve Banks. Those five positions would be filled by the twelve Reserve Bank presidents on a rotating basis. They were to give independent policy recommendations rather than being guided by their banks’ boards of directors as in the past. Most important, each Reserve Bank was required to follow the policies recommended by the FOMC and not operate on its own. The Board of Governors also gained the power to set reserve requirements, or the percentage of deposits that private banks in the system had to keep available to meet demands for withdrawals. The act left election of Reserve Bank presidents and vice presidents up to the banks’ boards of directors but made those choices subject to approval by the Board of Governors. These main provisions of the Banking Act of 1935 took power from the individual Reserve Banks and centralized it within the Board of Governors and FOMC. Eccles, who had been made chair of the Federal Reserve Board late in November, 1934, was chosen to chair the new Board of Governors that replaced it. Impact of Event The most important impact of the Banking Act of 1935 was its message: In the future, there would be a centralized guiding hand behind U.S. monetary policy. Along with other New Deal reforms such as the establishment of the Federal Deposit Insurance Corporation (which the Banking Act of 1935 amended), the act helped to persuade the American business community that there would not be another Great Depression. Businesspeople could predict a more stable American economy in which the government promoted a steady course of growth, with neither excessive unemployment nor the opposite problem, high rates of inflation. 255

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Businesspeople became relatively certain of being able to obtain bank credit for promising projects. Previously, they sometimes had faced bank loan officers who were unwilling to lend because they were uncertain about future national financial conditions and the availability of funds to their banks. Centralized and planned monetary control greatly reduced these uncertainties. Although individual banks would still fail, depositors and borrowers could rely on the Federal Reserve System to prevent large-scale bank failures. Banks themselves could count on a steadier, more predictable monetary policy environment in which to conduct business. Centralization of power made it possible and profitable for businesses and especially financial speculators to monitor the FOMC and try to guess its policy decisions, which were kept secret for several weeks to avoid any disruptive effects on financial markets. A new job function of “Fed watcher” thus was created. Formal centralization of control did not end debates concerning independence of the Federal Reserve System. Individual bankers still wanted influence within the system, and the Treasury Department was unwilling to relinquish control of the system completely. The Board of Governors agreed at first to cooperate with the Treasury by buying government bonds, as a means of keeping bond prices high to aid the financing of government operations. In 1936, the Board of Governors also exercised its new power to raise the required reserve rate. This acted to reduce the amount of money available to the financial system, more than offsetting the effects of bond purchases. The combined policy contributed to a minor recession in 1936 and 1937. Congress then proposed very specific guidelines for establishing monetary policy, leaving little room for discretion on the part of Federal Reserve System officials. The proposal was not made law, but system officials heeded the implicit warning to coordinate plans with other government agencies. The Board of Governors and FOMC chose not to exercise their powers to any great degree during the 1930’s, generally letting recovery from the Depression run its course. During World War II, the Reserve Banks agreed to cooperate with the Treasury’s borrowing, buying Treasury bonds to maintain their price and keep interest rates low. As the war neared its end, however, the Treasury’s desire to keep interest rates low conflicted with the FOMC’s wish to restrain the growth of the money supply as a means of preventing inflation. The Employment Act of 1946 stated that the government had a responsibility to use all of its tools in a coordinated fashion to maximize employment, production, and purchasing power. Implicitly, the act recognized that 256

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neither fiscal policy (use of government powers to tax and spend) nor monetary policy alone was powerful enough to control the U.S. economy. The FOMC continued to buy Treasury bond issues, but Federal Reserve System officials argued more strongly against the constraint that this cooperation imposed on their decisions. In March, 1951, an agreement was reached under which the FOMC was no longer responsible for supporting the price of Treasury bonds. That left the system without a clear and specific policy objective. The public had begun to believe in the power of monetary policy, so Federal Reserve System officials wanted to state clearly how that policy would be used. An appropriate growth rate of the money supply was chosen as one objective. The FOMC would provide enough money to finance business expansion without causing inflation. The second objective was to vary credit conditions countercyclically, reducing credit availability during business expansions and allowing easier credit during contractions, as a means of offsetting business cycles. The Board of Governors and the FOMC began to exercise their powers of central control in a manner basically independent of political or private business interests. Bibliography Broaddus, Alfred. A Primer on the Fed. Richmond, Va.: Federal Reserve Bank of Richmond, 1988. This seventy-four-page booklet summarizes the structure and operation of the Federal Reserve System. A long section is devoted to describing actions of the system in the 1970’s and early 1980’s. Also offers case studies. Useful for understanding the background of the Federal Reserve System. Clifford, Albert Jerome. The Independence of the Federal Reserve System. Philadelphia: University of Pennsylvania Press, 1965. Discusses the structural arrangement of the Federal Reserve System, including changes up to 1960. Valuable for its insights into debates concerning which public or private agencies should control the U.S. monetary system. De Saint-Phalle, Thibaut. The Federal Reserve: An Intentional Mystery. New York: Praeger, 1985. Provides a history of the U.S. system of bank regulations, including those related to overseas bank holding companies and international lending. Written for a high school or undergraduate audience. Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton, N.J.: Princeton University Press, 1963. The authoritative study of the operation of the U.S. monetary system. Economists Friedman and Schwartz provide a narrative discus257

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sion of the use of monetary policy, illustrated with detailed statistics. The use of theory is advanced in places, but arguments are always summarized clearly. The authors’ agenda is to prove the power of monetary policy; they devote more than one hundred pages to explaining how correct use of that policy could have prevented the Great Depression or at least minimized its effects. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Krooss, Herman E., ed. Documentary History of Banking and Currency in the United States. 4 vols. New York: Chelsea House, 1969. Volume 4 in this set covers the time period from 1913 to 1968, including passage of the original Federal Reserve Act of 1913. Much of the text reprints banking laws, with some commentary on them that was written at the time of their passage. Also reprints presidential speeches and letters as well as court decisions. Moore, Carl H. The Federal Reserve System: A History of the First Seventyfive Years. Jefferson, N.C.: McFarland, 1990. Highlights major events in the history of the Federal Reserve System, giving an overview of the issues faced by the system. Easy to read. Patman, Wright. The Federal Reserve System: A Study Prepared for the Use of the Joint Economic Committee, Congress of the United States. Washington, D.C.: Government Printing Office, 1976. Chapter 9, “The Banking Act of 1935,” gives a concise history of the political maneuvering behind passage of the act and rationales for its passage. Other chapters outline the history of the Federal Reserve System. Appendices contain letters and speeches by Patman concerning aspects of the U.S. banking system. A. J. Sobczak Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); The U.S. Stock Market Crashes on Black Tuesday (1929); The Banking Act of 1933 Reorganizes the American Banking System (1933); Congress Deregulates Banks and Savings and Loans (1980-1982); Bush Responds to the Savings and Loan Crisis (1989).

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THE CIO BEGINS UNIONIZING UNSKILLED WORKERS The CIO Begins Unionizing Unskilled Workers

Category of event: Labor Time: November 9, 1935 Locale: The United States The formation of the Congress of Industrial Organizations signaled the unionization of mass-production industries and their workers and labor’s increasing confrontations with management Principal personages: John L. Lewis (1880-1969), an AFL official and leader of the breakaway CIO unions William Green (1872-1952), the president of the AFL Philip Murray (1886-1952), a leading figure in the CIO Sidney Hillman (1887-1946), a CIO leader and head of the clothing workers Walter P. Reuther (1907-1970), a CIO organizer and a leader of the autoworkers Summary of Event In the mid-1930’s, the American Federation of Labor (AFL) was the oldest, largest, and most durable labor organization in the United States. Modestly begun in 1881 when a score of American and Canadian trade unions decided to federate, the AFL formally came into existence in Columbus, Ohio, in 1886, largely as a result of the efforts of Adolf Strasser, Samuel Gompers, and Peter McGuire. Strasser and Gompers, who more indelibly marked the character of the AFL than did the radical socialism of McGuire, were both foreign-born—Strasser in Germany, Gompers in Lon259

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don. Both men were cigar makers by trade and both flirted with Marxism and other forms of socialism. Anomalously, their foreign birth engendered scant affection in them for most immigrant workers. Their cigarmaking skills diverted them from sympathies with unskilled workers. In the light of what they perceived to be the realities of the American workplace and the outlook of American workers, they swiftly jettisoned their socialism because it appeared impractical. Gompers presided over the AFL from 1886 until his death in 1924, except during 1895. His like-minded successor, William Green, headed the union until 1952. The AFL remained a conservative federated organization of labor’s elite, that is, of skilled workers. The strategies to which its leaders clung reflected lessons learned from their own experiences and from those of their constituent trades’ rank-and-file workers. The nationwide unions that had preceded the AFL had all failed or were failing by 1886. Like the National Labor Union or the Knights of St. Crispin, both formed in the late 1860’s, or the Knights of Labor, established in 1871, these earlier unions— in company with various “labor reform” political parties—had cast their nets too widely. They were actively and ambitiously political. They recruited unselectively—men and women, immigrants and native-born, black and white, skilled and unskilled workers, even employers and professionals. They were chronically short of funds, could ill-afford their strikes, and were ravaged by economic depressions. They were weakened, too, by the hostile actions of legislatures and courts and won few friends among the general public of a predominantly agricultural nation. In contrast to such organizations, the AFL was officially nonpolitical and nonideological. It championed “bread-and-butter” or “business” unionism, concentrating on winning higher wages, shorter hours, and better working conditions. Its craft workers, mainly white and native-born or of northern European origin, resented competition from unskilled southern European immigrants and black workers, both of which groups tended to be willing to work for lower wages. Skilled workers had watched employers defeat unionization by exploiting the “babel of tongues” and diverse backgrounds common to unskilled workers and reckoned that inclusion of these workers in the AFL would prove disastrous. Furthermore, as skilled men (membership was overwhelmingly male), AFL members paid the higher dues that funded effective strikes: strikes of the essential workers whose walkouts sufficed to cripple industries. Within three decades, numbers confirmed the wisdom of such organizational strategies. By 1916, more than 2.1 million of America’s 2.7 million trade unionists belonged to the AFL. By 1935, the United States had changed dramatically but the AFL had not. The country had become overwhelmingly urban. A substantial portion 260

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of the workforce was engaged in manufacturing, at the vital core of which were relatively new mass-production industries with jobs filled largely by unskilled and almost entirely unorganized workers. Moreover, the administration of President Franklin D. Roosevelt, in a climate that warmed toward labor, witnessed the passage of impressive prolabor legislation. Accordingly, a fresh generation of AFL leaders recognized the limits of the old guard’s successes. They were eager to seize the moment and organize the millions of unskilled mass-production workers whom older AFL officials mostly resented or hoped to ignore. Clashes of personalities and perceptions climaxed on November 9, 1935, shortly after this long-rankling conflict erupted at the AFL’s annual convention. John L. Lewis, a veteran leader of the United Mine Workers (UMW), convened a meeting of other dissidents at the Washington, D.C., headquarters of the UMW. Among those present were Philip Murray, leader of the International Ladies’ Garment Workers’ Union (ILGWU); Sidney Hillman, who led the Amalgamated Clothing Workers; Thomas McMahon, head of the United Textile Workers; Harvey Fremming, representing the Oil Field, Gas, and Refinery Workers of America; and leaders of the mine, mill, and smelter workers, and of the cap and millinery trades. With Lewis as chairman, they formed the Committee for Industrial Organization, an AFL committee the purpose of which was to unionize workers in massproduction and other industries on an industrial rather than a craft basis. Workers would be organized by entire plants and industries rather than on the basis of dozens of discrete trades or crafts within those plants or industries. Declaring that the committee’s objective was simply to grasp organizing opportunities on behalf of the AFL, Lewis and the dissidents disavowed any desire to foster “dual unionism” or to raid the parent body’s unions for members. The committee’s aim, Lewis and his colleagues asserted, was to inform unorganized mass-production workers of the advantages of industrial unionism without producing disharmony or chaos within the AFL. Nevertheless, Lewis resigned his AFL vice presidency late in November, 1935, despite political allurements dangled before him by AFL president Green. Despairing of seeing sympathetic actions by the AFL executive committee, or by AFL membership at large at the annual convention, Lewis assumed the CIO’s permanent chairmanship the same month. For the next two years, he and his minority of CIO brethren, still remaining within the AFL, fought procedural and constitutional roadblocks thrown up against them by Green and other AFL officials, in the meantime trading self-justifications, challenging motives, mutually citing lost opportunities, implying communist influ261

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ences, and exchanging predictions of disaster. What labor historian Philip Taft described as the CIO’s “road to suspension” proved to be a lengthy one filled with acrimonious outbursts alternating with peace conferences. The suspension of Lewis’ UMW and (initially) nine CIO unions in other industries came on September 5, 1936. Their expulsion, along with exclusion of twenty CIO unions formed in the interim, was completed in 1938. Led by Lewis, the renamed Congress of Industrial Organizations then independently persisted in its challenge both to the AFL and to the captains and managers of major industries. Impact of Event Building around the half million members of John L. Lewis’ UMW, the CIO, in important regards, was born strong. Its constituent unions, upon their suspension or expulsion from the AFL, carried away 982,000 members from the AFL, almost one-third of the AFL’s strength. To these members were added the recruits gained by CIO organizers between the committee days of 1935 and separation in May, 1938. While CIO leaders were fighting their internecine battles within the AFL, they maintained their assiduous campaigns to bring industrial unionism to the unorganized, foremost to mass-production workers. Lewis and his CIO officials and organizers were presented with an array of opportunities that were matched both by subtle and by violent opposition from powerful industrial leaders and managers. Across America’s industrial terrain were millions of disgruntled nonunion employees, notably in the steel, automotive, rubber, chemical, electrical, aluminum, cement, meatpacking, textile, oil refining, shipbuilding, and long-haul truck transportation industries. As Walter P. Reuther demonstrated among autoworkers, these industries’ workers were primed for CIO industrial unionism. Beginning in the 1920’s, some areas of these industries became riddled with “company” unions, management-sponsored unions designed to forestall organization of workers by bona fide labor unions. These “tame” unions may have included as many as 2.5 million members by 1935. The Roosevelt Administration’s National Industrial Recovery Act (NIRA) of 1933, moreover, gave impetus to their growth. Ironically, Lewis, who was then regarded by many AFL officials as a conservative unionist (he was a staunch Republican as well), had participated in efforts to launch the NIRA, section 7a of which, in the name of industrial cooperation, opened the door officially to company unions. Employers who merely established their own unions, however, chose a relatively moderate course in trying to prevent real unionization. A somewhat more sophisticated approach toward breaking union efforts was 262

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widely publicized by the National Association of Manufacturers. The socalled “Mohawk Formula” was applied most notably by the president of Republic Steel against the CIO’s Steel Workers’ Organizing Committee. The formula called for employer-conducted strike balloting in concert with branding union leaders as outsiders, radicals, or communists. Coordinated threats were directed toward local communities, warning that unionization would force industry to leave town. The hiring of strikebreakers was masked under the guise of back-to-work movements, and reopenings of formerly struck factories and mills were touted widely as rescue operations conducted by sensible workers.

Steel was among the major industries whose disgruntled workers the CIO targeted for unionizing during the late 1930’s. (National Archives)

Convinced that basic American values were under assault, many employers used more obvious forms of coercion against unions, including resorting to overt violence. Despite passage in July, 1935, of the path-breaking prolabor National Labor Relations Act (the Wagner Act), which legally ensured labor’s right to organize and to bargain collectively, three more years were to pass before any noticeable atrophy of industry’s union-breaking tactics. The establishment of the CIO, massive division within the labor movement between craft and industrial unionism, passage of the Wagner Act, and the nation’s plunge by 1937 deeper into the Depression coincided with 263

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waves of antiunion violence. Daily news accounts and newsreels of bloody battles involving pickets or strikebreakers in steel, rubber, or automotive plants, for example, led many people to fear that the nation had sunk into insurrection or class warfare. The apparent stridency of union leaders, the militancy of organizing tactics, and the widespread suspicion that some CIO unions in particular were communist-inspired persuaded large sectors of the general public to sympathize with employers who hired and armed private guards. Such acquiescence also lent sanction to the deployment of police and troops by state and local authorities against union organizers, pickets, and strikers. Although the Roosevelt Administration became more actively prolabor by the mid-1930’s, the realities of management-labor relations continued to be harsh. During 1935 and 1936, forty-eight workers were killed on picket lines and more than ten thousand strikers were arrested. A wave of “sitdown” strikes featuring workers’ occupation of employers’ properties—a CIO tactic first tried on a large scale in an Akron, Ohio, Goodyear Tire & Rubber plant early in 1936—was especially unnerving to the propertyconscious public and served to heighten antilabor sentiments. The Chicago Memorial Day Massacre of peacefully demonstrating striking CIO steelworkers by Chicago police in 1937 epitomized company, community, and police attacks on unionists. Although the CIO’s defeats in trying to organize smaller steel plants and the construction industry bared its vulnerabilities, the rise in its membership to 3.4 million by 1938 was more rapid than that ever before experienced by an American labor union. Large sectors of the nation’s major industries, from automotive to coal mining to steel, were unionized by the CIO. Further, the CIO had developed what proved to be an increasingly effective political action committee. On balance, CIO victories cost the AFL little. Its leaders, stung into action by the “rebel” CIO, counted a membership of 4 million by 1939. Both federations were able to grow, mostly along the separate lines of craft versus industry and skilled versus unskilled workers. There were, however, many intense jurisdictional disputes as both federations tried to claim some newly forming unions. Bibliography Barnard, John. Walter Reuther and the Rise of the Auto Workers. Boston: Little, Brown, 1983. A fine summary written for lay readers. Provides an important vignette of mid-1930’s CIO activity in a major industry. Bibliographical essay on sources and useful index. Bernstein, Irving. The Turbulent Years: A History of the American Worker, 1933-1941. Boston: Houghton Mifflin, 1970. Excellent window into the 264

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subject. Clear, authoritative, and balanced narrative. Good notes, bibliography, and index. Brooks, Thomas R. Toil and Trouble: A History of American Labor. 2d ed. New York: Delacorte Press, 1971. Colorful reading with good personality sketches. The author’s prounion bias does not detract from a good general survey. No notes or bibliography. Useful index. Fine, Sidney. Sit-Down: The General Motors Strike of 1936-1937. Ann Arbor: University of Michigan Press, 1963. A clear scholarly view of specific CIO battles with business and the community. Notes, bibliography, useful index. Exciting reading. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Schlesinger, Arthur M., Jr. The Coming of the New Deal. Vol. 2 in The Age of Roosevelt. Boston: Houghton Mifflin, 1958. Wonderful for context on labor, government, and business in the mid-1930’s. Detailed chapter notes, excellent index. Stolberg, Benjamin. The Story of the CIO. New York: Viking Press, 1938. Good encapsulation of atmosphere and personalities affecting establishment of the CIO. A readable journalistic account, with some theory and some history. No notes or bibliography, but a good index. Taft, Philip. The A.F. of L. from the Death of Gompers to the Merger. New York: Harper & Brothers, 1959. An invaluable study, though at times dense reading. The best work of its kind for understanding the AFL and CIO dissidents. Chapter notes, valuable index. Clifton K. Yearley Cross-References The Norris-LaGuardia Act Adds Strength to Labor Organizations (1932); The National Industrial Recovery Act Is Passed (1933); The Wagner Act Promotes Union Organization (1935); Roosevelt Signs the Fair Labor Standards Act (1938); The AFL and CIO Merge (1955).

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THE DC-3 OPENS A NEW ERA OF COMMERCIAL AIR TRAVEL The DC- 3 Opens a New Era of Commercial Air Travel

Categories of event: Transportation and new products Time: June 25, 1936 Locale: The United States The Douglas DC-3 revolutionized air travel by providing passenger comfort and operating capabilities, together with profit-making potential, previously unavailable in the fledgling airline industry Principal personages: Donald W. Douglas (1892-1981), the founder of the Douglas Aircraft Company Jack Frye (1904-1959), the vice president of flight operations for Transcontinental & Western Air Lines Charles A. Lindbergh (1902-1974), the chief technical adviser for Transcontinental & Western Air Lines W. E. Patterson (1899-1980), the president of United Air Lines Edward (Eddie) Rickenbacker (1890-1973), the president of Eastern Air Lines C. R. Smith (1899-1990), the president of American Airlines Summary of Event The Air Mail Act of 1925 authorized the U.S. postmaster general to contract with any individual, firm, or corporation for the carriage of mail by aircraft between points designated by the postmaster general. This legislation signaled the beginning of what would become the airline industry. The Air Mail Act’s first amendment (in 1926) changed the basis for payment to these contract mail carriers, but even with this change, which essentially 266

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amounted to subsidization, the young airlines frequently had difficulty in generating a profit. The carriers came to recognize that additional revenue was possible if aircraft could carry passengers in addition to mail. This demand eventually led to a larger aircraft, suitable for combined mail/ passenger service. The first generation of these aircraft could accommodate from two to six passengers, but soon, larger multiengine aircraft became operational, the most popular of which were the all-metal Ford trimotor and Fokker’s wood and fabric trimotor, which used laminated plywood as the wing skin. It was this plywood wing that ultimately would lead to Donald W. Douglas’ DC series. In March, 1931, a Fokker trimotor owned by Transcontinental & Western Air Lines (TWA; became Trans World Airlines in 1950) crashed while en route from Kansas City to Wichita. One of the passengers aboard was Knute Rockne, Notre Dame’s famous and beloved football coach, whose death was mourned nationwide. Public pressure began to mount on the Department of Commerce as the news media became increasingly strident in calling for public release of information on the cause of the accident, particularly since Rockne had been one of the passengers. Ultimately, the Department of Commerce concluded not only that the accident was traceable to the Fokker’s wooden wing structure but also that all Fokker F-10’s should be grounded temporarily while inspections and structural fixes were made. Publicity surrounding the accident turned public opinion against Fokker’s trimotors, forcing TWA to depend solely on its Ford trimotors. The airline’s vice president of flight operations, Jack Frye, recognized that a more modern aircraft type was needed as soon as possible. Frye visited Seattle in an attempt to obtain some of Boeing Aircraft’s new B-247 models. The B-247 was a ten-passenger, streamlined, all-metal airplane that Boeing thought would revolutionize air travel. The first sixty B-247’s, two years worth of production, were destined for United Air Lines, an affiliated company then under the Boeing umbrella. Frye and his engineers, with technical advice from Charles A. Lindbergh, then proceeded to develop a set of specifications for a trimotored transport, and proposals were solicited from a number of aircraft manufacturing companies, the smallest of which was Donald Douglas’ company in Santa Monica, California. Douglas’ engineers, after studying TWA’s specifications, determined that they could meet the stringent requirements with a twin-engine airplane by using new design applications as well as new, more powerful engines then being developed by both the Wright Aeronautical Company and Pratt & Whitney. Eleven months after receiving the specifications, Douglas’ first version of this new generation of aircraft, the twelve-passenger Douglas 267

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Commercial-1 (DC-1) made its first flight. Even before the plane’s delivery to TWA, the airline was asking for design changes that would, among other things, increase the DC-1’s capacity by two passengers. TWA quickly ordered twenty-five of this new model, the DC-2. Douglas began work on the new version immediately after flight tests had been completed on the DC-1, and in May, 1934, TWA took delivery of its first DC-2. One of the earliest DC-2’s was delivered to KLM, the Royal Dutch Airline, and almost immediately was entered in the MacRobertson Trophy Race, the London-to-Melbourne Derby. Finishing second to a British twinengine fighter aircraft and well ahead of a Boeing B-247 in this contest, even while carrying a few passengers, helped firmly establish the DC-2 in the traveling public’s mind as the fastest and most reliable passenger aircraft yet made. As the number of carriers ordering the DC-2 continued to grow, Douglas’ engineers began working with specifications developed by American Airlines for an aircraft with sleeping berths that could provide American’s passengers with overnight transcontinental sleeper service. Stretching and enlarging of the DC-2 created a new aircraft, the DC-3. Because of its combination of operating performance, passenger comfort, and operating costs, the DC-3 quickly became the most widely used passenger airplane in the world. C. R. Smith, president of American Airlines, commenting on his company’s high regard for the DC-3, said that it was “the first airplane in the world that could make money just by hauling passengers.” Impact of Event In the years following the Army’s around-the-world flight in 1924 with Douglas-built airplanes, the company continued designing and building mostly military aircraft, but in 1931 TWA’s accident in Kansas ironically served to revolutionize air travel by presenting Douglas with an opportunity to enter the commercial aircraft market. TWA’s need was for a new type of aircraft that could exceed the performance capabilities of the Boeing B-247, about to be introduced by its chief competitor, United Air Lines. The B-247 gave United a definite competitive advantage over TWA, with its older and slower trimotors, but that advantage lasted only for little more than one year. On August 22, 1932, Jack Frye, seeking a new and competitive airplane for TWA, solicited proposals by sending letters containing the airline’s detailed specifications to six aircraft manufacturing companies. Donald Douglas later would refer to Frye’s letter as the “birth certificate of the modern airliner.” 268

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Douglas and his engineering staff, having decided that they could produce an aircraft capable of meeting or exceeding each of TWA’s design and performance specifications, submitted a proposal to TWA, and a contract was signed on September 20, 1932, for the first airplane, at a cost of $125,000, with a one-year option for up to sixty additional planes priced at $58,000 each. TWA later admitted to Douglas that obtaining financing for the purchase had been difficult. Bankers, it seems, doubted that an aircraft could be built that would meet all of TWA’s specifications. The DC-1 first flew on July 1, 1933. It could operate at 180 miles per hour while carrying twelve passengers. On the other hand, United’s Boeing B-247, the pride of its fleet, could carry only ten passengers while cruising at 165 miles per hour. At TWA’s insistence, Douglas immediately started making refinements to the DC-1, and orders began coming in for this improved model, the DC-2. Within two years, the DC-2 had evolved into the larger and more powerful DC-3, capable of carrying twenty-one passengers at 195 miles per hour. The DC-3 would continue as the workhorse of the world’s airlines through World War II and into the early postwar years. In February, 1934, President Franklin D. Roosevelt abruptly canceled all existing airmail contracts and transferred airmail operations to the Army Air Corps. The service, hampered by continuing and worsening budgetary reductions, was anxious to demonstrate its capabilities to Congress and the American public. Tragically, during the Army’s four months of air mail operation, there were sixty-six crashes and twelve fatalities, three of which occurred as Army pilots were en route to their assigned origination points. As the Army was preparing to fly the mail, the DC-1 was used to demonstrate the capabilities of airlines and their new aircraft. In a highly publicized demonstration flight only hours before the Army was to take over airmail carriage, Jack Frye of TWA and Eastern’s Eddie Rickenbacker flew the DC-1 from Burbank Air Terminal in California to Newark, New Jersey, in slightly more than thirteen elapsed hours, with two refueling stops, at Kansas City, Missouri, and Columbus, Ohio. The flight’s success did much to convince the American public of the efficiency and capability of the nation’s airlines. Although airmail contracts were again awarded to private carriers, effective June 1, the Roosevelt Administration’s change of heart resulted not from the February DC-1 demonstration flight of Frye and Rickenbacker but instead from growing public displeasure with the Army’s obvious inability to sustain the airmail operation with its inexperienced pilots flying virtually obsolete aircraft. Contractually, the airlines had been receiving from 42 to 54 cents per mile for airmail carriage, but the cost to the taxpayer of the Army’s operation was put at $2.21 per mile, an unacceptable difference. 269

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In June, with the contract situation resolved and airlines again carrying the mail, TWA began operating DC-2’s on its overnight service from Newark to Los Angeles, with intermediate stops at Chicago, Kansas City, and Albuquerque. At the same time, American Airlines, on its overnight transcontinental service, was operating a sleeper version of the Curtiss Condor, a twelve- to fifteen-passenger, twin-engine airplane that was the last bi-wing air transport in commercial service in the United States. After TWA quickly gained a competitive edge with its DC-2’s, American began looking for a replacement aircraft for the Condor, one capable of carrying a greater payload at a faster speed and at lower operating costs. American’s search began and ended at Douglas Aircraft. With American’s order for an upgraded version of the DC-2 that could accommodate sleeper berths, Douglas realized that this new model, the Douglas Sleeper Transport (DST), virtually would be a new airplane. The fuselage, enlarged to accommodate sleeper berths, could be fitted with twenty-one seats, and this new, larger version’s operating performance still handily exceeded that of the two-year-old DC-2’s. Although Douglas’ development costs for its DC-3 series reached $400,000, prospects for sales of this series were such that the company was not overly concerned. American Airlines was so pleased at the combination of passenger comfort, performance, and operating costs that over the next few years, at a cost of $110,000 per plane, its aircraft fleet gradually was converted exclusively to DC-3’s. This revolutionary airplane’s payload capacity, gross weight, and operating performance exceeded those of any other aircraft then in commercial operation. The DC-3 became an instant success with the airlines and their passengers. Although the DC-2 had proven successful, Douglas decided to terminate further production when it became evident that the DC-3 would outperform its predecessor rather significantly, and at lower operating costs. Up to that point, Douglas had built a total of 191 DC-2’s, the company recouping all of its development costs with the 75th aircraft. The success of the DC series caused Boeing to terminate its B-247 line at seventy-five aircraft. William Boeing’s revolutionary new transport had been in production for less than three years. In the meantime, a provision of the 1934 Air Mail Act prohibited any interlocking of airlines with aircraft manufacturing companies, a practice common up to that time. As a result, United Air Lines was freed of dependence on Boeing as its principal aircraft supplier, and United’s new president, W. E. Patterson, immediately contacted Douglas. United’s primary transport, the Boeing B-247, was no match for the DC-3, either competitively from a passenger standpoint or operationally from a perfor270

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mance and cost standpoint. Patterson realized that he needed to upgrade United’s fleet quickly, to the point that over the next few years United became almost exclusively a DC-3 airline. Eastern Air Lines quickly followed suit. It was becoming obvious to the entire industry that this new Douglas transport truly was revolutionizing air travel throughout the world. American Airlines, the first operator of the new DC-3 series, began taking delivery of both versions in mid-1936, putting its first DC-3, a sleeper version, into regular line service on June 25, 1936. Most aviation chroniclers consider that day to have marked the beginning of a new era in air transportation. The end finally was at hand for airline operations that had been delivering, at best, only marginal profits on an irregular basis. The DC-3, together with its predecessor, the DC-2, proved so popular with the traveling public that within the first calendar year following the DC-3’s introduction and first flight, one million passengers had flown on scheduled airlines in the United States. This total would grow significantly each year after doubling within two years to exceed two million in 1939. Douglas originally had estimated a total sales volume of 50 DC-3’s, but because of the airline’s popularity with travelers and operators alike, a total of 803 eventually were built. In addition, almost 10,400 military versions of the DC-3 saw service during World War II as the C-47. The DC-3 revolutionized commercial air travel throughout the world. Its well-deserved reputation for reliability and safety attracted more and more people to air travel. Within two years of the first DC-3 commercial flight, a significant industry milestone was reached when, for the first time, passenger revenues exceeded airmail revenues. From an airline standpoint, the DC-3 offered a virtually unbeatable combination of revenue potential and low operating costs. It is little wonder that by 1939, 90 percent of the world’s airlines were using the Douglas DC-3, a plane that unquestionably changed airline travel forever. Bibliography Glines, Carroll V., and Wendell F. Moseley. The DC-3: The Story of a Fabulous Airplane. Philadelphia: J. B. Lippincott, 1966. An excellent account of the DC-3’s evolution, although much more emphasis is placed on its military service in World War II than on its commercial airline role. Holden, Henry M. The Boeing 247: The First Modern Commercial Airplane. Blue Ridge Summit, Pa.: TAB Books, 1991. Interesting account of the development of the DC-3’s primary competitor, Boeing’s B-247, and the DC-3’s effect on Boeing and its pride and joy. Johnson, Robert E. Airway One. Chicago: United Air Lines, 1974. Written 271

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by a longtime member of United Air Lines’ top management, this is one of the better corporate narratives. Includes an interesting look at United’s developmental years and its changeover from a Boeing B-247 airline to a DC-3 airline. Kane, Robert M. Air Transportation. 11th ed. Dubuque, Iowa: Kendall/ Hunt, 1993. Primarily a college-level aviation textbook. Includes some interesting information on the early airline period and the evolution of the DC-3. Morrison, Wilbur H. Donald W. Douglas: A Heart with Wings. Ames: Iowa State University Press, 1991. An excellent account of the DC-3’s development, seen as one of the landmark accomplishments of this aviation pioneer. Pisano, Dominick A. “The Crash That Killed Knute Rockne.” Air & Space Smithsonian 6 (December, 1991): 88. A fascinating narrative of the accident that would lead TWA to request proposals for a new airplane that ultimately would become the revolutionary DC-3. James D. Matthews Cross-References Ford Implements Assembly Line Production (1913); The Panama Canal Opens (1914); Truman Orders the Seizure of Railways (1946); Carter Signs the Airline Deregulation Act (1978).

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ROOSEVELT SIGNS THE FAIR LABOR STANDARDS ACT Roosevelt Signs the Fair Labor Standards Act

Category of event: Labor Time: June 25, 1938 Locale: Washington, D.C. A Depression measure, the federal Fair Labor Standards Act stipulated minimum wages and maximum hours of work for employees of firms engaged in interstate commerce Principal personages: Franklin D. Roosevelt (1882-1945), the president of the United States, 1933-1945 Frances Perkins (1880-1965), a former social worker who as secretary of labor supported the act Harlan Fiske Stone (1872-1946), the chief justice who rendered the Supreme Court’s first decision on the act William Green (1873-1952), the president of the American Federation of Labor Thomas James Walsh (1859-1933), a U.S. senator who fought for the abolition of child labor Summary of Event Enacted into federal law on June 25, 1938, the Fair Labor Standards Act (FLSA) was part of a package of reform legislation characterizing the so-called “Second New Deal” of President Franklin D. Roosevelt that began with his landslide reelection in 1936. It applied to all businesses that were engaged in or that affected interstate commerce. Article I, section 8 of the U.S. Constitution, the “commerce clause,” provided the legal grounds 273

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granting federal jurisdiction to effectuate the act. Because the U.S. Supreme Court had begun giving broad construction to what was meant by interstate commerce (as it did in decisions regarding the Wagner Act, for example), the Roosevelt Administration believed it would have wide latitude in applying the act. The Fair Labor Standards Act placed a floor under wages and a ceiling over hours for those workers covered by it. Initially, it established a minimum wage of forty cents an hour, with provisions for subsequent increases, and mandated a maximum forty-hour workweek. To smooth the act’s implementation, the provisions for both wages and hours were to be phased into effect over eight years. The act also placed national authority behind the abolition of child labor. The labor of children under sixteen years of age was forbidden, and persons under eighteen years of age were prohibited from working in hazardous occupations, including mining. In its original form, however, a number of occupations were exempted from the FLSA’s coverage, notably farm laborers, professional workers, and domestic servants, although these exemptions would be altered in time. The original bill before Congress envisaged a special board to administer the law. In subsequent years, however, oversight of the act fell to the Department of Labor’s Employment Standards Administration. President Roosevelt had given little thought to placing his political prestige behind a wages and hours bill until 1937. In efforts to combat the Depression, the National Industrial Recovery Act of 1933 (NIRA), sponsored by Roosevelt during his “First New Deal,” sought to increase purchasing power by establishing minimum wages among the NIRA’s participating businesses and industries. Along with several other major pieces of early New Deal legislation, however, the NIRA was declared unconstitutional by the Supreme Court. By 1935, however, prolabor legislation and support for the incomes of disadvantaged groups were popular in Congress. The Guffey Coal Act of 1935 and the Merchant Marine Act of 1936, for example, each contained provisions to limit hours and raise wages. The institution of Social Security in 1935 was still another attempt to raise the incomes of disadvantaged groups. The National Labor Relations Act (Wagner Act) of 1935 threw federal protection around union organization and collective bargaining. The principles of a wages and hours bill were further vindicated in 1936 with congressional passage of the Walsh-Healy Government Contracts Act. Guided through Congress chiefly by Montana’s Democratic Senator Thomas James Walsh, long an enemy of child labor, the act mandated that a prevailing minimum wage, as determined by the secretary of labor, was to be paid to workers on all jobs performed under federal contracts worth 274

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more than $10,000. Work hours were limited to eight hours per day, and the labor of boys under the age of sixteen and girls under the age of eighteen was prohibited. Even with these enactments in the mid-1930’s, the United States continued to differ from other advanced economies in regard to promulgating national standards for wages and hours. The American version of laissezfaire economics was deeply rooted in an endemic individualism coupled with a widespread fear of peacetime government intervention. Consequently, the Roosevelt Administration faced serious difficulties in persuading Congress to pass the Fair Labor Standards Act. These difficulties were compounded by Roosevelt’s shift into a spirited campaign of reform following his 1936 reelection. The president was eager to defuse his growing popular opposition and restore the essence of several key programs of his first administration that had been held to be unconstitutional by the Supreme Court. He was also faced with a secondary economic depression that threatened to be as deep as the one that he had inherited in 1933. After initial rebuffs by Congress, the bill that became the Fair Labor Standards Act was introduced to the special congressional session called by Roosevelt in November, 1937. The bill was backed by the president’s message to the nation that a self-respecting democracy “can plead no justification for . . . child labor, no economic reason for chiseling workers’ wages or stretching workers’ hours.” Hugo L. Black, then a senator from Alabama and later a Supreme Court justice, had sponsored an earlier wages and hours bill. He chaired the joint congressional committees charged with conducting hearings on the bill. Backing his effort were socially conscious Progressives such as Secretary of Labor Frances Perkins, Leon Henderson, and White House aides Thomas Corcoran and Associate Justice Harlan Fiske Stone wrote the Benjamin Cohen. Supreme Court’s first decision on the Fair Labor Opposition to the bill was Standards Act. (Harvard Law Art Collection) 275

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intense. Critics branded the measure as fascist. The Chamber of Commerce and the National Association of Manufacturers (NAM) denounced the bill on both economic and constitutional grounds. Reflecting Southern textile and lumber interests, Southern congressmen fought bitterly against prospective federal interference in or regulation of their industries. Nor was organized labor of one mind. The American Federation of Labor (AFL) and its president, William Green, seeking important changes in the bill, temporarily joined the NAM in opposition, while the Congress of Industrial Organizations (CIO) under John L. Lewis was split on the measure. A Gallup Poll indicated that most Americans, from the North and the South, favored the bill, as did many Northern industries that competed with the low-wage, long-hour employment of Southern workers. Amid such divisions, many of the bill’s original features were dropped or amended. On June 13, 1938, the House passed the bill by a 291 to 97 vote. The Senate accepted it without a recorded vote. Roosevelt signed the FLSA on June 25, and it became effective on October 24. Impact of Event The FLSA reflected many debilitating and limiting congressional compromises, although over subsequent years amendments would remedy a number of these deficiencies. Leading economists in 1938 reckoned that in its original form the act covered fewer than eleven million workers, less than 25 percent of the employed labor force. Administration officials estimated that when the act took effect, nearly 300,000 workers covered by it were earning less than twenty-five cents an hour and 1.3 million workers normally labored more than forty-four hours a week. The national standard of a forty-hour work week did not arrive until 1940. The long battle to abolish child labor was also far from over. Entry into employment was restricted to those aged sixteen and over, and the act’s administrators could raise that age to eighteen for work in hazardous or unhealthy industries. Administrators could lower the age of employment to fourteen, however, in nonmanufacturing and mining industries in some cases. In addition, the act’s coverage did not extend to agriculture, personal services, street trades, or retailing, which collectively were the largest employers of children. The act proved to be the last of the Second New Deal’s major reform measures. It was also a popular law. A 1939 Gallup Poll showed that 71 percent of the country favored it, and it therefore came as a political blessing to an embattled President Roosevelt. The president’s own view of the measure was that it constituted “the most far-reaching and the most far-sighted program for the benefit of the workers ever adopted.” 276

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One purpose of the law was to secure better terms of employment for workers than they could secure acting alone. It undoubtedly raised wages for the lowest paid employees, particularly in the South. These included workers in sawmills, canneries, cigar factories, and textile mills. Depending on the degree of enforcement of the act, which generally was low, it shortened the hours of work where abuses were greatest. Its general effects varied widely, from very positive to negative, depending on a variety of factors including product prices, the extent of unionization and collective bargaining, and the state of the economy. Unions eventually applauded it because it curtailed competition from underpaid workers. The act also excluded from legal employment many people who wished to work, by putting their wages above what employers were willing to pay. The last word on the act was that of the Supreme Court. Until 1937, major New Deal programs had been almost systematically eviscerated by the Court. This had led President Roosevelt to launch an attempt to pack the Court with his own appointees, a legal, if unpopular, method of changing the Court’s conservative complexion by appointing additional justices. Politically, this unfolded as a battle that Roosevelt lost but a war—as a result of events beyond his control—that he won. Amid the controversy, five incumbent justices had either died or retired before the constitutionality of the FLSA came before the Court in 1941. Five new, ostensibly liberal, justices had been appointed by Roosevelt to replace them. As a consequence, when redrafted, several major New Deal programs that earlier had been killed by the Court passed the test of constitutionality before the substantially reconstituted Court. Labor observers thought it a foregone conclusion that the FLSA would find Supreme Court approval, but at the time, the Roosevelt Administration was not overly optimistic. The test of the Fair Labor Standards Act came before the Supreme Court as United States v. Darby Lumber Company in 1941. The Darby Lumber Company bought timber, transported it to its mill, and manufactured it into finished lumber, entirely within the state of Georgia. Its finished lumber, however, was thereafter shipped out of state, thereby entering interstate commerce. By FLSA criteria, Darby’s employees, who earned less than twenty-five cents an hour and who worked more than forty-four hours a week, were underpaid and overworked. Moreover, the company kept no records, as the Labor Department discovered when it tried to bring Darby into compliance with the FLSA. Darby’s rejoinder was that the FLSA was unconstitutional insofar as it sought to regulate manufacturing taking place entirely inside Georgia. A Georgia district court agreed with this reasoning. On appeal, the case went before the Supreme Court. At the request of Chief Justice Charles Evans Hughes, Justice Harlan 277

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Fiske Stone was asked to write the Court’s opinion, principally because Hughes deemed it to be a “great” case and because it involved issues that long had concerned Stone. Stone’s opinion sought first to reassert the absolute nature of congressional power over interstate commerce. In effect, this was designed to return the Court to the sweeping mandate it received from Chief Justice John Marshall in Gibbons v. Ogden in 1824, a position that had been eroded by Supreme Court decisions such as Hammer v. Dagenhart in 1918 that separated actual manufacturing activities from the stream of interstate commerce. Stone declared that congressional authority over interstate commerce, on the contrary, was “complete in itself . . . and acknowledges no limitations other than are prescribed by the Constitution.” That power, he argued, was not susceptible to modification by states. He granted that although manufacturing was not commerce, the shipment of manufactured goods outside a state was commerce and thus fell under national authority. In order to restore federal power over the regulation of child labor, Stone made his second assertion, namely that congressional power to regulate child labor was “plenary.” Such power was not limited to child labor in hazardous or unhealthy occupations. On both points and contrary to Darby’s plea, the Supreme Court was unanimous. The Fair Labor Standards Act survived its constitutional test and gained additional strength from Stone’s reaffirmation of Congress’s complete authority over interstate commerce. Bibliography Babson, Steve. The Unfinished Struggle: Turning Points in American Labor, 1877-Present. Lanham, Md.: Rowman & Littlefield, 1999. Bernstein, Irving. A Caring Society: The New Deal, the Worker, and the Great Depression. Boston: Houghton Mifflin, 1985. Clearly and sensitively written by a leading labor historian. Although there is a pro-New Deal bias, Bernstein maintains a critical balance. Chapter 5 deals specifically with the FLSA in one of the rare extensive discussions of the act outside federal documents. For context and details, the work should be read in its entirety. Douglas, Paul H., and Joseph Hackman. “The Fair Labor Standards Act of 1938 I.” Political Science Quarterly 53 (December, 1938): 491-515. _____. “The Fair Labor Standards Act of 1938 II.” Political Science Quarterly 54 (March, 1939): 29-55. A distinguished economist and a labor expert assess the immediate impact of the FLSA on the work force. Clear and concise. Very useful, although it must be supplemented for details of the act’s effects on child labor. 278

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Felt, Jeremy P. “The Child Labor Provision of the Fair Labor Standards Act.” Labor History 11 (Fall, 1970): 477-481. One of the clearer scholarly assessments of the subject in concise journal form. Examines three decades of the act’s child labor provisions at work. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Mason, Alpheus Thomas. Harlan Fiske Stone: Pillar of the Law. New York: Viking Press, 1956. Mason has produced several fine biographies, of which this is one. Stone was an important justice whose views changed during the troubled Depression-New Deal years. The index is useful in locating Stone’s opinions on interstate commerce and child labor. Rauch, Basil. The History of the New Deal. New York: Capricorn Books, 1963. A fine summary of the New Deal by an important historian. A sympathetic political portrait, it records work of Roosevelt’s “brain trust” in writing and fighting for the president’s legislation. The FLSA is treated as part of a complex political picture in chapter 13. Wilcox, Claire. Public Policies Toward Business. 3d ed. Homewood, Ill.: Richard D. Irwin, 1966. Excellent and authoritative review of the subject. Chapter 32 deals with the FLSA in the context of previous domestic and foreign legislation on wages and hours. Provides an overview of expanding government controls over economic and social life. Clifton K. Yearley Cross-References The Supreme Court Strikes Down a Maximum Hours Law (1905); The Supreme Court Rules Against Minimum Wage Laws (1923); The National Industrial Recovery Act Is Passed (1933); The Wagner Act Promotes Union Organization (1935); The Social Security Act Provides Benefits for Workers (1935); Congress Passes the Equal Pay Act (1963).

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THE 1939 WORLD’S FAIR INTRODUCES REGULAR U.S. TELEVISION SERVICE The 1939 World’s Fair Introduces Regular U.S. Television Service

Category of event: New products Time: April 30, 1939 Locale: New York, New York The National Broadcasting Company coverage of the New York World’s Fair opening began weekly television scheduling Principal personages: David Sarnoff (1891-1971), the president of Radio Corporation of America Franklin D. Roosevelt (1882-1945), the thirty-second president of the United States, whose speech opening the World’s Fair was the first talk by a president to be televised Philo T. Farnsworth (1906-1971), the developer of the cathode ray tube, the basis of the video viewing screen Vladimir Zworykin (1889-1982), the developer of the orthicon tube, the basis of the television camera Summary of Event Regularly scheduled U.S. television began on April 30, 1939, when President Franklin D. Roosevelt opened the New York World’s Fair. The fair, billed as “The World of Tomorrow,” featured futuristic designs, such as the Perisphere, a round globe in which visitors were carried up giant escalators to a revolving platform to look down on a model city of tomorrow. The six-hundred-foot pointed Trylon symbolized the aspirations of humankind. The fair, which attracted forty-five million visitors, advertised United States industry. It implicitly challenged the military might of Nazi 280

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Germany, which had recently rejected President Roosevelt’s plan to guarantee ten years of peace in Europe. The president’s speech stressed his desire for peace but emphasized the unity of Americans in times of threat. The speech climaxed a parade in which nearly twenty-thousand servicemen took part. The speech was the first presidential address to be televised. It was followed with speeches by New York Governor Herbert H. Lehman, New York City Mayor Fiorello La Guardia, and Fair President Grover A. Whalen. This telecast, lasting more than three hours, marked a personal victory for David Sarnoff, president of the Radio Corporation of America (RCA) since 1930. On April 20, 1939, ten days before the official fair opening, Sarnoff dedicated the fair’s RCA Exhibit Building, which would offer most visitors their first exposure to television. Sarnoff spoke before a television camera while several hundred people viewed him on receivers inside the building and at the RCA Building in Manhattan. Sarnoff announced that this marked the birth of a new art in America, one that would eventually transform society. He foresaw television’s use for entertainment and education as well as its impact on the American economy. Television broadcasting theoretically had been possible since Paul Nipkow of Germany had patented a system in 1884. Scottish inventor John Logie Baird developed the first workable apparatus in 1924 and gave his first public demonstration in London in 1926. His system was adopted by Germany in 1929. By 1939, German government stations provided programming five evenings a week. British television service began in 1936. These first systems, however, depended on awkward and complex mechanical devices that produced shadowy, low-definition images. Visually pleasing images depended on the replacement of the mechanical system by an all-electronic system. Philo T. Farnsworth had devised such a system by the age of eighteen. He formed his own company, then later worked for Philco. In 1930, he patented the scanner that became the basis of modern television tubes. The first public demonstration of his electronic system was given in Philadelphia in 1934. Vladimir Zworykin, whose inventions led to the modern television camera, became RCA’s director of electronic research; he first demonstrated his iconoscope in 1924. World War I had shown the need for an American communications technology independent of foreign powers and foreign ownership. With government sanction, RCA was chartered on October 17, 1919, absorbing the American Marconi Company, the pioneering wireless company that had originated in England, and eliminating its international affiliations. With stock exchanges and cross-licensing among affiliates that included General Electric, Westinghouse, American Telephone and Telegraph, and United 281

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Fruit, RCA held a virtual monopoly on patents for radio transmitting and receiving devices. In 1915, Sarnoff had accurately forecast the development of radio for home use. In an April, 1923, memo to the RCA board of directors, Sarnoff first forecast similar growth for television. In 1931, Sarnoff’s National Broadcasting Company (NBC) televised New York Mayor Jimmy Walker and a variety of entertainment acts, including George Gershwin playing the piano. William Paley, head of the Columbia Broadcasting System (CBS), NBC’s only competition, established two experimental stations in 1931, but RCA’s investment in television research gave it a commanding position. Development, however, was crippled by the stock market crash of 1929 and the Great Depression. Although the formation of RCA had been supported by the government, the Depression created strong opposition to big business, and the Justice Department brought an antitrust suit against RCA. The suit was not settled until 1932. Increasing competition brought the need for broadcasting standards. In 1934, Congress passed the Communications Act, which created the Federal Communications Commission (FCC), with power to regulate all communications service. If television sets were to be sold, the FCC had to mandate uniform standards. Lawsuits, scandals, investigations, and appeals to the commission delayed commercial development. At the height of the Depression, however, few Americans could have paid the $200 to $1,000 prices of the sets available, at a time when $1,000 would purchase a new car. In 1938, Sarnoff announced that RCA would offer television sets for sale in time for the opening of the New York World’s Fair, but it was estimated that only about two hundred sets had been purchased in the metropolitan New York area, primarily by industry professionals and the curious well-todo. Two NBC television vans were at the fair, one handling the pickup and the other relaying signals to the transmitter atop the Empire State Building. Cameras telecast the grounds and crowds. Fairgoers learned that studio shows would be televised from Radio City on Wednesdays and Fridays, between 8 and 9 p.m. Telecasts from the fair would be broadcast on Wednesday, Thursday, and Friday afternoons. Impact of Event The immediate, but temporary, effect of the World’s Fair broadcast and publicity was a proliferation of television broadcasts. On May 17, 1939, NBC televised a Princeton University/Columbia University baseball game, billed as the world’s first televised sporting event. On August 26, NBC telecast a professional baseball game between the Brooklyn Dodgers and the Cincinnati Reds at Brooklyn’s Ebbets Field. NBC broadcasts from 282

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Radio City featured cooking demonstrations, opera, and comedy, all live. A fashion show was broadcast from the Waldorf-Astoria Hotel, and there were broadcasts of the crowds at the 1939 New York premiere of Gone with the Wind. A dramatization of Robert Louis Stevenson’s Treasure Island was televised, as was a seventy-minute feature film, Young and Beautiful. In October, 1939, NBC screened Edwin S. Porter’s classic silent film The Great Train Robbery (1903). This limited programming lasted through 1939 and 1940. By mid-1939, RCA was marketing four models of television sets, and at least sixteen other manufacturers were in the market, including Philco, which had sponsored much of Farnsworth’s research; General Electric; and Westinghouse. Set owners were encouraged to mail in their programming preferences; these indicated that sports would be an audience favorite. RCA then began a crash program to turn out additional mobile transmitter units. Studios for other major markets in Washington D.C., Philadelphia, and Chicago were prepared, linked through coaxial cables. The first such linkage in the United States was between New York and Philadelphia in 1936. Television stations similarly proliferated and by May, 1940, twentythree stations were broadcasting. In 1940, the Federal Communications Commission was divided as to whether television was ready for commercial broadcasting standards. The industry itself was not in agreement. Some companies, including RCA, DuMont, and Philco, argued that television could not yet offer enough programming to justify commercial operation and that standardization at that time would freeze development at a level below its potential. In April, 1941, transmission standards were finally adopted by the FCC. Commercial operations were approved effective July 1, and two New York stations, NBC and CBS affiliates, went into operation. New York station WNBT began broadcasting to an estimated forty-seven hundred television set owners and began regular news broadcasting with commentator Lowell Thomas. By the end of that year, the first commercial on television, financed by Bulova watch manufacturers, had been aired. In December, with the bombing of Pearl Harbor and the entrance of the United States into World War II, commercial development was halted while American industry was retooled for wartime production. When Allied victory was ensured, RCA reopened its television studio on April 10, 1944. CBS reopened on May 5. At the war’s end in 1945, nine part-time and partly commercial television stations were on the air, reaching about seventy-five hundred set owners in the New York, Philadelphia, and Schenectady, New York, areas. Although newspapers did not yet print schedules and viewers could not know when programming would be 283

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available, NBC broadcast four nights a week by late 1944, generally The Gillette Cavalcade of Sports, while CBS featured a radio game show transferred to television, Missus Goes A’Shopping, on two nights a week. With such meager programming, only about five thousand sets were produced in 1946, but that number increased to 160,000 in 1947. During prime time hours, the four networks that by then existed—American Broadcasting Company (ABC), CBS, NBC, and DuMont—could still provide only about ten hours of programming a week. Sporting events were featured, with boxing and wrestling especially popular. Bars and taverns were among the principal purchasers of sets. In late 1948, it was estimated that only 10 percent of the population had even seen a television show. Modern programming essentially began in 1947, with such shows as the Kraft Television Theatre, a live-drama program that presented 650 plays in about eleven years. In 1947, too, the first popular children’s shows were featured: The Howdy Doody Show and Kukla, Fran, and Ollie. The most important development came in 1948, when the William Morris talent agency ran an advertisement in Variety, saying that vaudeville was back. This was the announcement of the Texaco Star Theater, which premiered on June 8, on NBC. It had been a radio variety show. With Milton Berle, Henny Youngman, and Morey Amsterdam, all vaudeville performers, as hosts, the show brought to television names and faces that previously could only be heard on radio or seen occasionally in movies. CBS followed with Ed Sullivan’s Toast of the Town. By fall, all four networks were regularly broadcasting prime time programming. In the spring of 1948, industry experts estimated that of the 300,000 sets in operation, more than half were in public places; a year later, 940,000 homes had television receivers. By 1949, production of sets had jumped to 3,000,000. Bibliography Abramson, Albert. The History of Television, 1880 to 1941. Jefferson, N.C.: McFarland, 1987. Contains compact and comprehensive chapters on technological developments between 1671 and 1900 that led to television, in language generally accessible to nonspecialists. Later chapters are more technical. Includes developments outside the United States generally ignored in American television histories, such as the 1930’s development of television in Japan and London television service between 1936 and 1939. Barnouw, Erik. Tube of Plenty: The Evolution of American Television. Rev. ed. New York: Oxford University Press, 1982. The most readable of the general surveys of television development, this is a condensation and updating of Barnouw’s three-volume set, A History of Broadcasting in the United States, published between 1966 and 1970. 284

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Bilby, Kenneth. The General: David Sarnoff and the Rise of the Communications Industry. New York: Harper & Row, 1986. A comprehensive study of Sarnoff in the context of his industry. This is a relatively unbiased account by a former RCA executive and associate of Sarnoff. It covers the full range of Sarnoff’s career and gives a more superficial account of RCA after Sarnoff. Includes a useful bibliography. Everson, George. The Story of Television: The Life of Philo T. Farnsworth. New York: Norton, 1949. This uncritical biography was written by a man who, recognizing the young Farnsworth’s ability, helped him find funding for his research laboratory. It emphasizes the rags-to-riches odyssey of Farnsworth from farm boy to internationally known inventor but provides material unavailable elsewhere. Geddes, Keith, and Gordon Bussey. The Setmakers: A History of the Radio and Television Industry. London: British Radio and Electronic Equipment Manufacturers’ Association, 1991. Although concerned with the British industry, this book gives examples of model design and advertisement unavailable elsewhere, especially for the early years of radio and television. The text illustrates European and British developments generally overlooked by American historians. Excellent illustrations. Goldstein, Norm. Associated Press: The History of Television. Avenal, N.J.: Outlet Book Company, 1991. The best-illustrated history of television. The text is unquestionably the easiest to read of those listed here; unfortunately, after the initial chapters, Goldstein tends to ignore international events and technological developments, so that this is primarily a history of American television. Lichty, Lawrence W., and Malachi C. Topping, comps. American Broadcasting: A Source Book on the History of Radio and Television. New York: Hastings House, 1975. Part of the Studies in Public Communication Series, this volume collects a variety of articles under the topics “Technical,” “Stations,” “Networks,” “Economics,” “Employment,” “Programming,” “Audiences,” and “Regulation.” The contents range widely, from an article on Jack Benny to a history of the American Marconi Company. Almost all articles are comprehensible to a general audience. Lyons, Eugene. David Sarnoff. New York: Harper & Row, 1966. Although this biography is less objective and critical than others cited here and was written during Sarnoff’s lifetime, it is easily read. The author, Sarnoff’s cousin, provides considerable material about Sarnoff’s family, his early poverty and pursuit of a career, and his rise from office boy to executive. Sarnoff, David. Looking Ahead: The Papers of David Sarnoff. New York: McGraw-Hill, 1968. Collects Sarnoff’s most important speeches and 285

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communications from 1914 to 1967, arranged under such categories as “Wireless Communications,” “Radio Broadcasting,” “Black-and-White Television,” and “The Communications Revolution.” Includes the 1915 memo forecasting household entertainment through radio and the similar prediction for television of 1923. Most papers are abridged. Sobel, Robert. RCA. New York: Stein & Day, 1986. Written in a wooden style, but gives a comprehensive picture of the development of RCA from its origins in the American Marconi Company to the time of writing. Includes charts containing information on finances, ownership, and production. Extensive and valuable bibliography. Betty Richardson Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Congress Establishes the Federal Communications Commission (1934); The U.S. Government Bans Cigarette Ads on Broadcast Media (1970); Cable Television Rises to Challenge Network Television (mid-1990’s).

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ROOSEVELT SIGNS THE EMERGENCY PRICE CONTROL ACT Roosevelt Signs the Emergency Price Control Act

Category of event: Government and business Time: January 30, 1942 Locale: Washington, D.C. Adoption of the Emergency Price Control Act gave the Office of Price Administration the power to control prices of civilian goods and rents during World War II Principal personages: Franklin D. Roosevelt (1882-1945), the president of the United States, 1933-1945 Leon Henderson (b. 1895), the first administrator of the Office of Price Administration and Civilian Supply William S. Knudsen (1879-1948), the director-general of the Office of Production Management Prentiss M. Brown (1889-1973), the administrator of the Office of Price Administration, January to October, 1943 James F. Byrnes (1879-1972), the head of the Office of Economic Stabilization, 1942-1943, and of the Office of War Mobilization, 1943-1945 Chester Bowles (1901-1986), the administrator of the Office of Price Administration, 1943-1946 Paul Porter (1904-1975), the last administrator of the Office of Price Administration, formerly a New Deal lawyer and chairman of the Federal Communications Commission Harry S Truman (1884-1972), the president of the United States, 1945-1953, who fought a losing battle to retain price controls during the postwar transition to a peace economy 287

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Summary of Event As the American military buildup in the face of the threat from the Axis Powers accelerated in the spring of 1940, the United States began to face shortages of critical materials. Shortages raised difficult and politically sensitive questions concerning the proportion of the nation’s resources to reserve for civilian use and how to allocate the available supplies fairly. The problem was aggravated because government spending on defense was placing large amounts of cash into the hands of consumers. The United States spent an estimated $288 billion to fight World War II, compared to the $9 billion annual federal budget in 1940. Disposable personal income (income after taxes) rose from $92 billion to $151 billion during the war, while the supply of civilian goods and services (measured in constant dollars) increased only from $77.6 billion to $95.4 billion. With so much money pursuing a limited supply of goods, the government became concerned with preventing runaway inflation that could wreck the economy. The federal government followed a complex of strategies to keep inflation under control. Higher taxes imposed by the Revenue Act of 1942 soaked up part of the increased consumer purchasing power. Expanded sales of Series E government savings bonds to individuals similarly took out of circulation money that otherwise would have gone to purchase goods and services. Another weapon was the wage stabilization program administered by the National War Labor Board, which was established in January, 1942, to settle labor disputes in war industries. The Office of Price Administration, however, constituted the linchpin in the battle against inflation. President Franklin D. Roosevelt established the Office of Price Administration and Civilian Supply (OPACS) by executive order on April 11, 1941. The OPACS was given a dual responsibility. It was to prevent inflationary price increases and to stimulate provision of the necessary supply of materials and commodities required for civilian use, in such a manner as not to conflict with military defense needs. Concurrently, it was to ensure the “equitable distribution” of that supply among competing civilian demands. Roosevelt appointed as OPACS administrator Leon Henderson, an economist who had risen from director of the Research and Planning Division of the National Recovery Administration to become one of the most influential New Deal leaders. In 1939, Roosevelt had appointed Henderson to the Securities and Exchange Commission. An outspoken champion of competition, opponent of monopoly, and defender of consumers, Henderson was temperamentally and ideologically at odds with the business executives who were brought to Washington, D.C., to mobilize the 288

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economy for the impending war. Roosevelt aggravated the situation by his typical practice of dividing responsibility and leaving blurred the lines of authority among different officials. Henderson perceived a duty to act as spokesman for civilian needs. He accordingly came into bitter conflict with William S. Knudsen in the spring of 1941 over control of the priority system for the allocation of scarce materials. Knudsen, a former General Motors executive, as director-general of the Office of Production Management (OPM) was responsible for expanding military production. Roosevelt’s establishment of the Supply Priorities and Allocations Board (SPAB) in August, 1941, under former Sears, Roebuck and Company executive Donald M. Nelson placed that control in the hands of those giving military demands top priority. With the establishment of the SPAB, the functions of the OPACS in the allocation of materials among competing civilian users were transferred to the OPM. The result was the administrative separation of price control from production control. The OPACS was renamed the Office of Price Administration (OPA). Rising prices accompanying the defense buildup shifted the focus of Henderson’s attention to the problem of inflation. The OPA lacked effective power to halt the spiral of rising prices, and the inflation rate reached 2 percent per month by the end of 1941. Although Roosevelt asked Congress in July, 1941, for prompt action on price stabilization, the lawmakers dragged their feet until after Pearl Harbor. The Emergency Price Control Act, which Roosevelt signed into law on January 30, 1942, authorized the OPA to set maximum prices and to establish rent controls in areas in which defense activity had affected rent levels. Because Henderson thought some price increases to be necessary as incentives to expand production, he delayed acting under this new authority until late April. The OPA then issued its first General Maximum Price Regulation, requiring that sellers charge no more than the highest price charged in March, 1942. This move slowed down, but failed to halt, the rise in the cost of living. The regulation worked satisfactorily for standardized articles but did not do so for products such as clothing, for which manufacturers and sellers could hide price increases through changes in style, quality, or packaging. The biggest loophole, however, was the provision that the congressional farm bloc wrote into the Emergency Price Control Act barring the imposition of price ceilings on farm products until their prices reached 110 percent of “parity,” a level that would put product prices where farmers believed they ought to be. With most farm products thus excluded from price controls, food prices increased 11 percent during 1942.

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Impact of Event The conflict over allocation of resources between military and civilian needs resurfaced in the so-called “feasibility” dispute that reached its climax in the fall of 1942. Henderson took the lead in attacking the armed services for exaggerating their supply needs at the expense of the civilian economy. The immediate dispute was resolved by a compromise whereby the military program was cut back through extending scheduled delivery dates farther into the future. The military won the larger battle. In October, 1942, Roosevelt established the Office of Economic Stabilization under James F. Byrnes, formerly a senator from South Carolina and Supreme Court justice, to take charge of wage and price stabilization. Because of his political skills, his contacts in Congress, and Roosevelt’s confidence, Byrnes was able to expand his control over all matters relating to the economy. That control was formalized by the creation in May, 1943, of the new Office of War Mobilization, which was to coordinate the activities of the different war agencies. With Byrnes in charge, the armed services had the upper hand when questions arose about military versus civilian needs. At the same time, the military services successfully resisted the imposition of OPA price ceilings on the purchase of military supplies. In the fall of 1942, Henderson had to agree to exempt “strictly military goods” from maximum price controls in return for a promise by the services to try to hold down prices and the profits of suppliers. Although this exemption did not apply to materials going into military end products, approximately two-thirds of the War Department’s prime contracts were outside OPA control. The OPA was more successful in maintaining price ceilings on consumer goods. Faced with a continued rise in the cost of living resulting from exemption of most farm products from the Emergency Maximum Price Regulation, Roosevelt in September, 1942, warned Congress that unless the lawmakers voted to rectify the situation, he would act himself on the basis of his war powers. After a bitter struggle, Congress approved the AntiInflation Act of October, 1942, giving Roosevelt most of what he wanted. The legislation authorized the president to freeze wages and salaries, prices (including those of agricultural products), and rents at their levels on September 15. Roosevelt proceeded immediately to institute freezes. The cost of living, however, continued to rise. By April, 1943, prices were on average 6.2 percent above the September 15 level, with food prices rising even more. The OPA came under increasing pressure from producer groups and their congressional allies to relax price controls, and from labor unions for higher wages. The turning point in the battle against inflation came on April 8, 1943, when Roosevelt ordered the economic stabilization agencies 290

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to “hold the line” against further price and wage increases. He followed this order with governmental seizure of coal mines to break a miners’ strike for higher wages. The OPA simultaneously launched an aggressive campaign to roll back food prices. That campaign culminated in a 10 percent reduction in the retail prices of meat, coffee, and butter. Along with price and rent controls, the OPA adopted a system of rationing for particularly scarce commodities. The purposes of rationing were to combat inflation by preventing a bidding war for scarce goods, to ensure equitable distribution, and to give priority to military needs by restricting consumer demand. Rationing began at the end of December, 1941, with automobile tires as the first rationed good. A severe rubber shortage had resulted from the Japanese seizure of Southeast Asia. Rationing was extended to sugar, coffee, and gasoline in 1942. Rationing was instituted in 1943 for meats, fats and oils, butter, cheese, and processed foods. Shoes were added later. At the peak of rationing, the OPA administered thirteen rationing programs. Rationed goods still represented only one-seventh of total consumer expenditures. There were two types of rationing. One—applied, for example, to gasoline and rubber tires—involved a priority system under which different quotas were allotted on the basis of need. Equal rations for all were the rule, with few exceptions. The second type of rationing, the point system, was a scheme whereby a whole family of items (such as meats, fish, cheese, and butter) was lumped together, with each item in the family given a point value. Consumers were allotted a certain number of points per month and were free to spend those points as they wished. The OPA exercised control at the final stage of the distribution chain. Retailers would collect ration coupons or stamps from their customers and had to give them to their suppliers before they could get a new supply of the article. Administration at the consumer level was delegated to approximately fifty-six hundred local rationing boards. This arrangement had important political advantages, as the boards were made up of respected and influential members of the local community. The accompanying price was lack of uniformity across the country. From the first, the OPA was a center of political infighting. As was the norm under Roosevelt, rival bureaucrats maneuvered to expand their empires. Thus Henderson clashed with Secretary of the Interior Harold L. Ickes, the petroleum administrator, over gasoline rationing, and with War Food Administrator Chester C. Davis over food rationing. Patronagehungry politicians strove to control appointments to OPA positions. A host of rival interests jockeyed for favored treatment. Henderson’s vocal championship of consumers against pressure groups from business, agriculture, 291

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and labor antagonized producer groups and the conservative coalition of Southern Democrats and Republicans in Congress. In December, 1942, Henderson resigned, officially for reasons of health; he appears to have been pushed out by Roosevelt because he had become too much of a political liability. Roosevelt replaced Henderson as OPA administrator in January, 1943, with Prentiss M. Brown, a Democratic senator from Michigan who had just been defeated for reelection partly because of his support for agricultural price controls. Brown was succeeded in October, 1943, by former advertising executive Chester Bowles. In February, 1946, New Deal lawyer and Federal Communications Commission chairman Paul Porter became the last OPA administrator. The OPA did not work perfectly. There were numerous cases of evasion of price controls and rationing. Landlords in areas where housing was scarce, for example, often demanded an under-the-table payoff before renting an apartment. There was a large black market in such goods as coffee and soap. Because of the time and difficulties involved, the OPA rarely instituted criminal prosecutions of violators; its major enforcement tool was a court injunction to prevent further illegal sales. Mistakes in the handling of rationing were a major contributor to the OPA’s unpopularity. The introduction of rationing for sugar and coffee was accompanied by what many thought was excessively restrictive and pointless bureaucracy and regulation. Even worse, the OPA had by 1944 issued food rationing coupons far in excess of available supplies. A survey in late fall showed that consumers had an average of 2.8 months of unused food coupons. When the temporarily successful German counterattack in the Battle of the Bulge at the end of 1944 threatened to further cut supplies, authorities canceled the unused coupons despite their previous pledge that no such action would be taken. The OPA was largely successful in keeping consumer prices under control. Living costs had increased by almost two-thirds from 1914 to the end of World War I. In contrast, the cost of living rose only by approximately 28 percent from 1940 to the end of World War II. Most of that increase came before adoption of the Anti-Inflation Act of October, 1942. Living costs increased less than 2 percent during the last two years of the war. Perhaps most important, most Americans enjoyed a higher standard of living at the war’s end than they had before it began. The end of the war led to a bitter struggle over continuation of the OPA. The new president, Harry S Truman, backed Bowles in his plan for a gradual relaxation of wartime controls over prices, wages, and scarce commodities to smooth the transition to a peacetime economy. On the day after the surrender of Japan, the OPA ended rationing of gasoline, fuel oil, and processed foods. By the end of 1945, only sugar remained under 292

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rationing. During late 1945 and early 1946, the OPA was able to control price increases, but inflationary pressures were gaining momentum. Consumers were buying in black markets, labor unions were pushing for wage hikes, and manufacturers and farmers had joined with Republican leaders in Congress to demand an end to all controls. A battle raged through the spring of 1946 over extension of the OPA. A conservative coalition of Republicans and Southern Democrats passed through Congress in late June, 1946, a price control bill extending the OPA for one year but drastically cutting its powers and commanding it to decontrol prices “as rapidly as possible.” Instead of acquiescing, Truman vetoed the bill on June 29 and allowed price controls to expire on July 1. Prices rose sharply, while shortages of meat, sugar, electrical appliances, housing, and automobiles continued. In late July, Congress approved a second bill extending price and rent controls for one year. Truman reluctantly accepted it, but the damage had been done. The new measure was even weaker and more confusing than the one that Truman had vetoed. Republican speakers and advertisements during the election campaign in the fall of 1946 made the confusion and failure in the price control program a major theme. One incident was particularly damaging to the Truman Administration and the Democrats. When the OPA restored price ceilings on meat in August, 1946, farmers withdrew their cattle from the market to force a change in policy. While shoppers waited in vain for meat, Republicans seized on the shortage as a campaign issue. After the Republicans won control of both houses of Congress, Truman gave up the fight. He ended all wage and price controls, except those on rents, sugar, and rice, on November 9, 1946. The OPA began to wind up its affairs a month later. Bibliography Bowles, Chester. Promises to Keep: My Years in Public Life, 1941-1969. New York: Harper & Row, 1971. An autobiography concerning his years of public service. Extensive account of Bowles’s struggles as OPA administrator. Chandler, Lester V. Inflation in the United States, 1940-1948. New York: Harper & Brothers, 1951. An analysis of the forces responsible for inflation during and following World War II. Emphasizes the role of government fiscal and monetary policies. Chandler, Lester V., and Donald H. Wallace, eds. Economic Mobilization and Stabilization: Selected Materials on the Economics of War and Defense. New York: Henry Holt, 1951. An anthology of materials treating problems of economic mobilization and stabilization during wartime, drawing heavily on the experience of the United States in World 293

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War II. Part 4, “Direct Stabilization Controls in Wartime,” focuses on the OPA’s price control and rationing policies. Harris, Seymour. Price and Related Controls in the United States. New York: McGraw-Hill, 1945. A sympathetic detailed account of OPA price and rent controls by an economist who served with the agency. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Mansfield, Harvey C., et al. A Short History of OPA. Washington, D.C.: Office of Temporary Controls, OPA, 1948. The indispensable official history of the OPA, written by a team headed by one of the country’s leading experts in public administration. Polenberg, Richard. War and Society: The United States, 1941-1945. Philadelphia: J. B. Lippincott, 1972. An excellent survey of all aspects of the American home front during World War II. Includes a brief but perceptive account of the struggle for economic stabilization. Rockoff, Hugh. Drastic Measures: A History of Wage and Price Controls in the United States. Cambridge, England: Cambridge University Press, 1984. A comprehensive history of efforts to control wages and prices. Compares the United States’ experiences in World War I, World War II, and the Korean War. Somers, Herman M. Presidential Agency: OWMR, the Office of War Mobilization and Reconversion. Cambridge, Mass.: Harvard University Press, 1950. An excellent account of James F. Byrnes’s coordination and direction of the wartime government management of the economy. U.S. Bureau of the Budget. The United States at War. Washington, D.C.: Government Printing Office, 1946. This official history is a comprehensive survey of the wartime government management of the economy. John Braeman Cross-References The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); Roosevelt Signs the Fair Labor Standards Act (1938); Truman Orders the Seizure of Railways (1946); Congress Passes the Equal Pay Act (1963).

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THE UNITED STATES BEGINS THE BRACERO PROGRAM The United States Begins the Bracero Program

Category of event: Labor Time: August 4, 1942 Locale: Washington, D.C. Initiated as a war measure to ensure adequate agricultural labor supplies during World War II, the bracero program was continued until 1964, when it was terminated on the basis of alleged negative influences on the employment of domestic workers Principal personages: Willard Wirtz (1912), the secretary of labor who allowed the bracero program to expire in 1964 Claude R. Wickard (1893-1967), the secretary of agriculture, 19401945 William R. Poage (1899-1987), a congressman who cosponsored Public Law 78 Allen J. Ellender (1890-1972), a U.S. senator who cosponsored Public Law 78 Summary of Event The bracero program for importation of Mexican labor importation into the United States was begun in 1942 in response to the rising complaints of southwestern farmers and railroad shippers of a severe agricultural labor shortage. Agriculturalists argued that the military draft, along with highpaying defense-industry jobs, had drawn large numbers of agricultural workers away from farms at the very time that uninterrupted agricultural production was needed for military success. Without foreign contract labor, 295

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they concluded, food shortages were inevitable. Although many economists, most notably Conrad Taeuber, head agricultural economist of the Bureau of Agricultural Economics, disagreed with this view of the agricultural labor market, the Franklin D. Roosevelt Administration responded to pressure and opened negotiations with Mexico for temporary contract laborers. Mexico’s initial response, however, was negative. Mexican officials sharply reminded the United States of the long and exploitive history of U.S. relations with Mexican workers. During the Great Depression, the United States had forcibly returned hundreds of thousands of Mexican laborers to Mexico in an effort to protect the jobs of American citizens. Unless the United States was willing to accede to a host of procedural safeguards for these temporary workers, Mexico was unwilling to allow its citizens to cross the border. These safeguards included having individual contracts written in Spanish, each with guarantees to pay living expenses and to provide adequate shelter and transportation costs while a worker was in transit. Workers were further protected from all discriminatory acts and were not subject to the U.S. military draft. Wages were to be set at an annually determined “prevailing wage” based on the locality in which the laborer was to be employed. Most important, these contracts were between the Mexican and U.S. governments, not the worker and employer. The idea was that the U.S. government, as the primary contractor, would “sublease” the workers’ contracts to farmers. This meant that the U.S. government held the ultimate responsibility for ensuring that the contracts’ provisions were upheld. It also gave the Mexican government the power to limit the number of workers allowed into the United States if discriminatory practices occurred or if contracts were violated. Under pressure to act, President Roosevelt agreed to these concessions and, on August 4, 1942, signed an executive agreement initiating the bracero program. Roosevelt drew his authority to initiate the program from the Immigration Act of 1917. Although it specifically prohibited contract agricultural workers, that act allowed the commissioner general of immigration and the secretary of labor to admit otherwise inadmissible persons. Roosevelt then assigned the Farm Security Administration (FSA) of the Department of Agriculture the responsibility to administer the program. From the start, the program was controversial. Farmers disliked the restrictions imposed on them by the program, particularly the wage provisions, which they saw as a first step toward universal wage regulations for agriculture. They also distrusted the FSA, which they believed was generally in opposition to farmers. At the same time, labor disliked the program as run by the FSA because of its lax rules as to the setting of the “prevailing 296

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wage.” Ideally, the “prevailing wage” in a region was to be set by the market. Where labor is scarce, wages should rise. Only where labor shortages existed after wages rose were braceros to be allowed. In practice, however, the FSA allowed farmers to set the “prevailing wage” at the beginning of the growing season, and if this wage was inadequate to attract enough domestic workers, the farmers were allowed to bring in braceros. In April, 1943, dissatisfaction with the FSA resulted in passage of Public Law 45, in which Congress gave its approval to the bracero program. In doing so, however, Congress significantly reshaped the operation of the program. First, it removed the FSA as administrator of the program, giving this authority to the Cooperative Extension Service (CES). This presumably was done to satisfy the complaints of large growers about the FSA. The CES was also a part of the Department of Agriculture, but unlike the FSA it was historically allied with large growers and shippers. In addition, the wage and working condition provisions of the original executive order were not included in Public Law 45. Although the government would still hold contracts with individual braceros, it would not have the power to demand the application of a “prevailing wage.” Instead, the power to set wages was, in effect, returned to farmers. In practice, farmers had always had the power to set wages; this law merely formalized the process. Following the end of World War II, the original justification for the bracero program ended. On December 31, 1947, so too did the executive agreement between the United States and Mexico. Public Law 45, however, remained on the statute books, authorizing the use of braceros if the U.S. government wished it. Harry S Truman’s administration did. On February 21, 1948, a new labor importation agreement was concluded with Mexico. In following years, similar annual agreements would be signed. The post1948 agreements also drew their authority from the 1917 Immigration Act. There were, however, a few significant differences between the new agreements and those from wartime. The U.S. government would no longer be the employer of record for braceros. Instead, individual growers or growers’ associations contracted directly with Mexico for bracero workers. This meant that the government was no longer legally responsible for the fulfillment of bracero contracts. This provision of the post-1948 agreements was to bring a further change in the bracero program in 1951. Angered over repeated violations of contract provisions by U.S. farmers, and empowered by the growing demand for immigrant labor resulting from the Korean War, the Mexican government demanded that the U.S. government reacquire control over bracero contracts. Congress responded on July 12 with Public Law 78, which returned the bracero program to a government-to-government basis 297

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and thus placed the responsibility for guaranteeing that the provisions of bracero contracts were met directly on the U.S. government. With this change in place, the postwar bracero program was complete. It continued unchanged until 1964. The reformism of the New Frontier and the Great Society finally killed the bracero program. Both the John F. Kennedy and Lyndon B. Johnson administrations thought that braceros cost American workers jobs and permitted farmers to keep agricultural wages low. Without braceros, the reasoning went, farmers would have to raise wages to get enough workers to pick their crops. In 1961, President Kennedy ordered Secretary of Labor Arthur Goldberg to look into ways to protect domestic workers. Goldberg’s successor, Willard Wirtz, recommended that the program, which came up for renewal in 1964, not be renewed. On December 31, 1964, the bracero labor importation program was allowed to expire. Impact of Event There is little doubt that the bracero program had effects on the agricultural sector of the United States both during and after World War II. By the end of 1947, when the first bracero program ended, some 220,000 workers had been recruited under the program. In the years following, the annual number of braceros working on U.S. farms ranged between 50,000 and 350,000. This many contract laborers could not help having an impact both on the agricultural output of the nation and on working conditions in the agricultural sector. It is difficult to say, however, how significant their impact was. During World War II, for example, braceros made up only a part of the total number of Mexican laborers working on U.S. farms. In reaction to Texas’ historic discrimination against Hispanic people, Mexico refused to contract any braceros to Texas for the first five years of the program. This meant that Texas farmers had to use either domestic laborers or illegal immigrant workers. Many Texas farmers chose illegal workers, even after Mexico allowed braceros to contract in Texas. Following the war, the use of illegal workers by many U.S. farmers, in preference to both braceros and domestic laborers, continued. During the mid-1950’s, the immigration enforcement mechanism became overloaded. Tens or even hundreds of thousands of illegal immigrants were deported every year. They made up only a fraction of the “wetbacks” (a term then used in legal documents) actually working on U.S. farms. Only with “Operation Wetback,” a multidepartment, multiyear effort by the U.S. and Mexican governments to halt the flow of illegal immigrants northward, did the number of such laborers working on U.S. farms decrease, and then only temporarily. 298

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Given the large number of illegal workers on U.S. farms during the period in which the bracero program operated, it is difficult to argue that the bracero program had any significant effect in raising agricultural wages. In fact, the opposite seems more plausible. Wartime problems with the “prevailing wage” system got worse following the war, when contracting powers were placed directly in the hands of farmers. The return of the U.S. government as official contractor of braceros after 1951 did not bring much effective change in the wage-reducing effects of the bracero program. Throughout the period, agricultural wages remained low in comparison to those in other sectors of the economy. As late as 1964, the Mexican government continued its support of the bracero concept. It believed that the program provided significant protections to Mexican workers in the United States that would be absent without a formal agreement. It also worked to improve relations between the United States and Mexico and helped to improve working conditions on U.S. farms for both Mexican and domestic workers. The program also helped keep the already troublesome problem of illegal immigration from getting worse. Following the end of the program in 1964, the number of illegal Mexican workers increased. The flood would continue to grow well into the 1980’s. Bibliography Craig, Richard. The Bracero Program: Interest Groups and Foreign Policy. Austin: University of Texas Press, 1971. Examines the various interests pushing for the bracero program and the reasons why it changed over time. Galarza, Ernesto. Merchants of Labor: The Mexican Bracero Story. Charlotte, N.C.: McNally and Loftin, 1964. An account of the operation of the bracero program in California from 1942 to 1960. Offers an early evaluation of the program’s operations and effectiveness. One of few book-length examinations of the bracero program. A good place to start a study of the bracero program. Garcia, Juan Ramon. Operation Wetback: The Mass Deportation of Mexican Undocumented Workers in 1954. Westport, Conn.: Greenwood Press, 1980. Examines the problem of undocumented Mexican workers in the 1950’s. Useful as a background to the later parts of the bracero program. Hawley, Ellis W. “The Politics of the Mexican Labor Issue, 1950-1965.” In Mexican Workers in the United States: Historical and Political Perspectives, edited by George C. Kiser and Martha Woody Kiser. Albuquerque: University of New Mexico Press, 1979. The best account of the politics behind the bracero program in the 1950’s. Explains why the program was continued throughout the decade and why it was ended in 1964. The 299

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volume contains other important essays. See especially the short summary of the second bracero period on pages 67-71. Kirstein, Peter. Anglo over Bracero: A History of the Mexican Worker in the United States from Roosevelt to Nixon. San Francisco, Calif.: R and E Research Associates, 1977. An essential survey of U.S. policy toward Mexican laborers, both legal and illegal. Provides useful background and details about the bracero program. Pfeiffer, David G. “The Bracero Program in Mexico.” In Mexican Workers in the United States: Historical and Political Perspectives, edited by George C. Kiser and Martha Woody Kiser. Albuquerque: University of New Mexico Press, 1979. Describes the Mexican side in organizing and running the bracero program. Scruggs, Otey M. “Texas and the Bracero Program, 1942-1947.” In Mexican Workers in the United States: Historical and Political Perspectives, edited by George C. Kiser and Martha Woody Kiser. Albuquerque: University of New Mexico Press, 1979. Discusses the operation of the bracero program during World War II. Stresses the limited nature of this program for Texas. Explains the opposition of many farmers to the bracero program and shows many of the efforts of farmers to undermine the program’s effectiveness. Charles Zelden Cross-References Roosevelt Signs the Fair Labor Standards Act (1938); Roosevelt Signs the Emergency Price Control Act (1942); Eisenhower Begins the Food for Peace Program (1954); Congress Passes the Equal Pay Act (1963); The North American Free Trade Agreement Goes into Effect (1994).

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ROOSEVELT SIGNS THE G.I. BILL Roosevelt Signs the G. I. Bill

Category of event: Government and business Time: June 22, 1944 Locale: Washington, D.C. The G.I. Bill provided veterans with readjustment benefits such as unemployment compensation; loan guarantees for purchases of homes, farms, and businesses; and tuition and subsistence for education and training Principal personages: Frederic Delano (1863-1953), the planning agency head who raised the idea of veterans’ benefits in 1942 Franklin D. Roosevelt (1882-1945), the president who spoke on radio and before Congress in favor of veterans’ benefits in 1943 Warren Atherton (1891-1976), the American Legion leader who appointed the committee that drafted the original version of the G.I. Bill Joel Bennett “Champ” Clark (1890-1954), the Missouri Democrat and veterans’ subcommittee chair who shepherded the G.I. Bill through the Senate John Rankin (1882-1960), the Mississippi Democrat who dominated House veterans’ committee hearings on the G.I. Bill Summary of Event The Servicemen’s Readjustment Act of 1944 (Public Law 346), commonly known as the G.I. Bill of Rights or G. I. Bill, provided economic and educational benefits for World War II veterans. Individuals who had served ninety or more days in the U.S. armed forces after September 16, 1940, could take advantage of readjustment benefits to ease their transition into 301

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In 1932 World War I veterans converged on Washington, D.C., demanding payment of the bonuses they had been promised. The government drove the “bonus army” away and burned out its encampments in an ugly confrontation that the Roosevelt administration did not wish to see repeated after World War II. (National Archives)

the civilian economy. The federal government sought to provide temporary help in finding postwar employment, assistance in obtaining educational credentials, and loan guarantees for purchases of homes, as well as farms and businesses. Between July, 1942, and June, 1944, government agencies, the president, veterans’ groups, and Congress worked out the provisions of the G.I. Bill in a complicated policy-making process. Discussion of readjustment benefits centered on unemployment, federal loan guarantees, and education. Temporary benefits included counseling for return to prewar jobs, job placement by a new Veterans’ Placement Service Board working with the U.S. Employment Service and veterans’ centers, and unemployment compensation, for a maximum of fifty-two weeks, of $20 per month. Veterans could apply for loan guarantees up to a maximum of 50 percent of a $4,000 loan, payable in full within twenty years, to purchase a home, farm, or business. Loans would be administered through the Veterans Administration (VA), which would work with private banks, lending agencies, and businesses. Educational opportunities involved tuition payments up to $500 per year and subsistence allowances of $50 per month for single veterans and $75 per month for married veterans or those with dependents, for a maximum of four years. Through the educational program, veterans could earn high school diplomas, attend trade and business schools, or receive 302

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college or graduate school educations. The G.I. Bill enabled veterans of World War II to become one of the best educated, most prosperous, and successful middle-class generations in U.S. history. During previous wars, the government had made few plans for veterans. From the 1780’s to the 1930’s, land grants for Revolutionary War veterans, pensions for Union troops of the Civil War, and controversial cash bonuses for World War I doughboys had been the extent of federal assistance. Remembering controversial bonus bills in the interwar years, veterans’ lobbying power, and high unemployment during the Depression, the administration of Franklin D. Roosevelt haltingly began postwar planning in 1942. Frederic Delano, head of the National Resources Planning Board (NRPB), made the first overture. In July, 1942, Delano sought the president’s support for postwar planning. Roosevelt denied approval for any public effort but reluctantly accepted a small interagency group. Between July, 1942, and April, 1943, the NRPB’s Conference on the Post-War Readjustment of Civilian and Military Personnel conducted its work, submitting its final report four days after Congress abolished the NRPB. Recommendations included a postwar full employment policy and specific educational and reemployment benefits for veterans and war workers. Roosevelt created the Armed Forces Committee on Post-War Educational Opportunities for Service Personnel (the Osborn Committee) knowing that benefits for military veterans would receive a friendly hearing in Congress. Although Roosevelt never endorsed any specific group’s proposals, he called publicly for a range of veterans’ benefits in national fireside radio chats on July 28 and October 27, 1943. On the latter date, he submitted the NRPB/Osborn Committee recommendations to Congress, following up with a strong message to Congress on November 23, 1943. Warren Atherton, national commander of the American Legion, a veterans’ organization founded in 1919, received instructions at the group’s convention in September, 1943, to appoint a committee to draft a comprehensive veterans’ benefits bill. That committee’s omnibus bill included previous ideas and new provisions for loan guarantees for purchasing homes, farms, and businesses. Promoted as the “G.I. Bill of Rights,” the American Legion bill restricted unemployment compensation benefits, especially for striking workers, more than had previous federal proposals. Legion officials released the omnibus bill on January 8, 1944, and introduced it into Congress two days later. Congressional hearings and negotiation over an amended Legion bill proceeded with dispatch. Conservative Mississippi Democrat John Rankin, a longtime veterans advocate with close links to the Legion, sponsored the 303

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House bill, while maverick Senator Joel Bennett “Champ” Clark (D-Missouri) and nine other senators introduced the Senate version. Between January 10 and March 10, 1944, Clark’s Senate Subcommittee on Veterans’ Legislation of the Finance Committee held nine hearings sessions. Key veterans’ groups including the Veterans of Foreign Wars, the Military Order of the Purple Heart, the Disabled American Veterans, and the Regular Veterans Association initially opposed passage, arguing that the bill would overlook disabled veterans in favor of able-bodied ones. A compromise bill incorporating educational provisions of a bill sponsored by Senator Elbert Thomas (D-Utah) passed the full Senate on March 24, 1944, by a vote of 50-0. Between January and May, 1944, Congressman Rankin’s Committee on World War Legislation held sixteen public and nineteen executive sessions. Rankin insisted on changes restricting unemployment benefits for striking workers, so the bill was amended. On May 18, 1944, the full House approved the bill by a unanimous vote of 388-0. House support included the votes of 149 representatives who were Legion members. A grassroots letter campaign mounted by the American Legion broke a temporary deadlock in the conference committee. One week after the Allied invasion of France across the English Channel, both houses of Congress unanimously approved the amended compromise bill. President Roosevelt used ten pens to sign the bill into law on June 22, 1944. The final version of the bill provided for VA hospital construction as well as unemployment compensation, loan guarantees, and educational benefits. Impact of Event Between 1944 and 1956, millions of veterans used their readjustment benefits to great advantage. In the short term, veterans received help in obtaining work; loans to buy homes, farms, or businesses; and financing for education. In the long term, G.I. Bill expenditures helped promote growth of the postwar mixed economy, improved the educational level of an entire generation of the work force, and generated advantages that made World War II veterans part of an expanding middle class. Unemployment compensation in 1946 and 1947 assisted about one million veterans per year. The readjustment allowances of $20 per week for up to fifty-two weeks led to permanent reemployment of veterans moving into a postwar economy that many Americans feared would see the return of high unemployment. In limiting the amount and length of compensation, the act marked a retreat from original recommendations while establishing the principle that veterans joined the “52-20 Club” while looking for permanent employment. 304

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In 1945 and 1946, the United States suffered a severe housing shortage. Between 1945 and 1955, lending agencies approved 4.3 million home loans totaling $33 billion. Twenty percent of those loans were made possible by the Veterans Administration (VA). Some veterans combined New Deal-era federal mortgage insurance with a VA loan to purchase houses worth as much as $10,000. The postwar baby boom generation, including survivors of the Depression and World War II, saw VA-financed housing as a valuable commodity in the postwar United States. Guarantees for loans to purchase farms and businesses were among the more controversial G.I. Bill programs. During the original debate, some argued that small-scale farm ownership through a VA loan made little sense in urban-industrial America. Others feared that unscrupulous business owners would take advantage of veterans interested in going into business for themselves by overstating the prospects of businesses they wanted to sell. Legally, a veteran could use a loan guarantee only to buy into a partnership or to set up a new business. No VA loan money could be used as working capital to pay operating expenses or inventory costs in any business. Small business leaders viewed the idea as an opportunity to regain ground lost to the large industrial manufacturing firms that had dominated wartime defense contracting. In 1945, more than twelve million Americans served in the armed forces. By 1946, slightly more than three million people remained in the services. That fall, more than one million veterans enrolled in colleges and universities. Of 15.6 million eligible veterans, 7.8 million obtained education or training under the generous educational provisions of the G.I. Bill. Although only 30 percent of World War II veterans went on to earn college degrees, their numbers included 2,232,000 under the G.I. Bill. Although perhaps 80 percent of those probably would have gone to college even without the G.I. Bill, some estimates showed that 20 percent of those graduates could not have afforded a higher education without the G.I. Bill. G.I. Bill students were the most talented, highly achieving, and oldest college students in U.S. history. Older and married veterans paved the way for later generations in becoming part of the undergraduate and graduate student populations. According to the Veterans Administration, the G.I. Bill helped to educate 450,000 engineers; 360,000 teachers; 243,000 accountants; 180,000 physicians, dentists, and nurses; 150,000 scientists; 107,000 lawyers; and 36,000 members of the clergy. Vocational training at private business schools proved more problematic, as millions of dollars were lost through waste, fraud, and student withdrawals before completion of programs. Some veterans used their benefits to finish interrupted high school programs or received credit for General Educational Development tests begun during the war. 305

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Over the long term, the G.I. Bill represented the emergence of the postwar mixed economy of increased cooperation between the public and private sectors. By 1956, the federal government had paid out $14.5 billion in G.I. Bill educational benefits, including $5.5 billion in college loans. This investment in the nation’s human capital was on the scale and of the same importance as the Marshall Plan, which rebuilt Western European economies, and the 1964 tax cut, which helped to spur economic growth. By 1955, the total cost of G.I. Bill programs was at least $20 billion. By 1968, total expenditures had reached $120 billion. In return, the U.S. economy obtained the best-trained work force in its history. The Servicemen’s Readjustment Act of 1944 proved to be among the most successful pieces of economic and social legislation in U.S. history, rivaling the Social Security Act (1935), the National Labor Relations Act (1935), the Fair Labor Standards Act (1938), the 1964 tax cut, the Civil Rights Act of 1964, the Medicare and Medicaid health care programs (1965), and the Americans with Disabilities Act (1990). The complicated policy process leading to passage and implementation of the G.I. Bill brought together veterans, federal agencies, the president, Congress, veterans’ organizations, and private businesspeople to promote the principles of federal assistance for military veterans and sustained economic growth and prosperity. The bill led to a range of precedent-setting programs in postwar America. More limited versions of the original G.I. Bill would assist veterans of later wars. The Employment Act of 1958, and the social welfare programs of the 1960’s built on the successful precedent of the G.I. Bill. Bibliography Ballard, Jack Stokes. The Shock of Peace: Military and Economic Demobilization After World War II. Washington, D.C.: University Press of America, 1983. Superbly researched narration of U.S. demobilization efforts during and after World War II. Places the G.I. Bill in context with other readjustment measures. Blum, John Morton. V Was for Victory: Politics and American Culture During World War II. New York: Harcourt Brace Jovanovich, 1976. The most sophisticated account of mobilization on the home front. Discusses the G.I. Bill in the light of congressional politics, weakening of New Deal reforms, and Roosevelt’s 1944 “Economic Bill of Rights.” The epilogue gives a moving picture of returning veterans. Mosch, Theodore R. The G.I. Bill: A Breakthrough in Educational and Social Policy in the United States. Hicksville, N.Y.: Exposition Press, 1975. Overview of educational sections of G.I. bills of 1944, 1952, and 1966. Valuable tables. Mosch discusses state as well as national pro306

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grams and includes comparison of U.S. veterans’ benefits with those in other countries. Olson, Keith W. The G.I. Bill, the Veterans, and the Colleges. Lexington: University Press of Kentucky, 1974. The best study of educational aspects of the G.I. Bill, with topical chapters including excellent summaries of the origins of the G.I. Bill, a case study of the University of Wisconsin, and a conclusion comparing the World War II, Korean War, and Vietnam War-era G.I. bills. Pencak, William. For God and Country: The American Legion, 1919-1941. Boston: Northeastern University Press, 1989. The first scholarly history of the American Legion in its formative years of the 1920’s and 1930’s. Chapter 7, “Veterans Benefits and Adjusted Compensation,” gives background on the bonus for World War I veterans and how it affected the provisions of the Legion’s omnibus bill, which in amended form became the G.I. Bill. Perrett, Geoffrey. Days of Sadness, Years of Triumph: The American People, 1939-1945. New York: Coward, McCann & Geoghegan, 1973. Reprint. Madison: University of Wisconsin Press, 1986. The most comprehensive history of the American home front. Written in a lively style, packed with information, and persuasive in showing the period as “the last great collective social experience” in American history. One of the few histories to show the significance of the G.I. Bill in both the short and long terms. Ross, Davis R. B. Preparing for Ulysses: Politics and Veterans During World War II. New York: Columbia University Press, 1969. The most comprehensive analysis of veterans’ benefits, including mustering out pay, the G.I. Bill, demobilization, reconversion, and housing. Ross’s view of the complicated policy-making process makes this work the single best account of the G.I. Bill. The concluding chapter is the best summary of the ways in which World War II veterans were treated better than those of other wars. Severo, Richard, and Lewis Milford. The Wages of War: When America’s Soldiers Came Home—from Valley Forge to Vietnam. New York: Simon & Schuster, 1989. Severo, a reporter for The New York Times nominated several times for the Pulitzer Prize, and Milford, a onetime lawyer for the National Veterans Law Center in Washington, D.C., provide a comprehensive review of the postwar treatment of military veterans over the sweep of U.S. history, helping to place the exceptional positive case of World War II veterans in proper historical perspective. Patrick D. Reagan

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Cross-References The Wagner Act Promotes Union Organization (1935); The Social Security Act Provides Benefits for Workers (1935); The Truman Administration Launches the Marshall Plan (1947); Congress Creates the Small Business Administration (1953); The Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy (1964); Johnson Signs the Medicare and Medicaid Amendments (1965); Bush Signs the Americans with Disabilities Act of 1990 (1990).

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TRUMAN ORDERS THE SEIZURE OF RAILWAYS Truman Orders the Seizure of Railways

Categories of event: Government and business; transportation Time: May 17-25, 1946 Locale: Washington, D.C. Amid the crises of postwar reconversion, President Harry S Truman ordered seizure of the railroads, accelerating a reconsideration of relations among government, business, and labor Principal personages: Harry S Truman (1884-1972), the U.S. president who ordered federal seizure of the railroads in the public interest John Roy Steelman (b. 1900), a Truman aide and a negotiator with the railroad unions Alvanley Johnston (1875-1951), the president of the striking Brotherhood of Locomotive Engineers Alexander Fell Whitney (1873-1949), the president of the striking Brotherhood of Railway Trainmen Clark Clifford (1906-1998), a White House aide who helped draft Truman’s nationwide speech on the rail strike Robert A. Taft (1889-1953), a Senate Republican leader who opposed Truman’s proposal to draft strikers Summary of Event The year following the end of World War II was filled with a succession of crises in the United States attending domestic readjustments to peace. Organized labor had fared well between 1939 and 1945, relative to the Depression years of the 1930’s, but the swift demobilization of thirteen million service personnel, the lasting effects of many wartime economic restrictions, and the destabilizing results of industrial reconversions, rising 309

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prices, and unslaked consumption provoked an unprecedented eruption of labor unrest. During the spring and summer of 1946, the United States was paralyzed by a record wave of strikes, and still more and worse strikes were feared. Despite full employment during wartime, comparatively high wages, and much overtime work, organized labor felt restrained by the imposition of many wartime regulations and by the results of its wartime cooperation with management. The consolidations and mergers of many industries—that is, what appeared to be a continuing trend toward monopoly—and suspicions that management had used patriotism to garner exorbitant shares of profits while abusing labor’s voluntarism as a means of regaining control of the workplace were only a few of the factors that exacerbated labor leaders’ growing discontent with the postwar world. The strikes of 1945 and 1946 affected only about 1 percent of the total labor force. In many respects industrial reconversion was proceeding satisfactorily, if not smoothly. At the peak of these stoppages, nearly 550 strikes were in progress, constituting a loss of more than 3 percent of available workers’ time and directly involving about 1.4 million men and women. Statistics obscure the critical economic importance of the industries that were being struck: steel, automobiles, petroleum, meatpacking, and, more important because the nation’s power was so dependent upon it, coal mining. Additional threats of a nationwide railroad strike, one capable of paralyzing nearly all economic activity, further aggravated President Harry S Truman. Until the spring of 1946, Truman had been a model of patience in dealing with the nation’s labor problems. From the beginning of his political career in Missouri through his days in the U.S. Senate, Truman had been a trusted friend of organized labor and had enjoyed its staunch support in all of his elections, including his run for the vice presidency during Franklin D. Roosevelt’s fourth and last presidential campaign. In addition, during his years in the Senate Truman had earned high repute as an expert in railroad affairs. Consequently, at the first hint of a rail strike in early 1946, Truman invoked the Railway Labor Act (1926), which called for a sixty-day mediation period while the principal issue, a wage hike, was negotiated. To oversee negotiations between railroad management and representatives of twenty rail unions, Truman appointed Secretary of Labor Lewis Schwellenbach. Negotiations languished for months despite the passage of Schwellenbach’s responsibilities as mediator to economist and White House staffer John Roy Steelman. In April, although eighteen of the disaffected unions had agreed to an accommodation, two of them, each essential to railroad operations, notified the Truman Administration of a strike to begin on May 18. Together, the two 310

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unions were capable of pulling 280,000 railroad workers from their jobs. This potentially disastrous situation was further complicated by the fact that Alvanley Johnston, president of the Brotherhood of Locomotive Engineers, and Alexander Fell Whitney, president of the Brotherhood of Railroad Trainmen—the heads of the holdout unions—were longtime political allies of Truman. Both were distinguished veteran union men whose quarrels with railroad management were venerable. Both had supported Truman in his 1940 Senate race as well as in his run for the vice presidency. On May 17, the president summoned Whitney and Johnston to the White House. There the union leaders argued that their men were demanding a work stoppage. Truman responded by signing an executive order authorizing government seizure and operation of the railroads. Under this pressure, Whitney and Johnston agreed to a strike delay of five days. In the interim, troops seized the railroads and Truman called upon other political figures to urge compromise upon the union leaders. He proposed an 18.5-cent-perhour pay raise for railroad workers, more generous than suggested by a fact-finding commission. Whitney and Johnston remained intractable. Media attention focused on the White House as the strike deadline approached. An hour before the scheduled strike, on May 23, Truman addressed nearly nine hundred wounded veterans on the South Lawn, conscious of the contrast between their sacrifices and the dangers posed to the country by two union leaders. Behind him, inside the White House, negotiations remained stalemated. At five o’clock, as scheduled, the strike began. Its impact was immediate. Neither the great rail strike of 1877 nor the American Railway Union’s strike of 1894 had so completely paralyzed rail traffic. Of the nation’s nearly two hundred thousand freight and passenger trains, about four hundred remained operative amid the vast disruption. The White House at once came under fire for its apparent failure to steer negotiations to a successful conclusion. Truman’s reaction—one opposed by many of his cabinet members, friends, and aides—was rage. The following day, he drafted a blistering radio speech. In its original version, the speech bitterly denounced the unions’ leaders, sharply and inaccurately contrasting their pay with his own and, with equal inaccuracy, comparing the pay of railroad workers with that of soldiers. It simultaneously vilified other labor leaders, along with Congress, and virtually called for vigilantism against those who jeopardized the nation’s welfare. Although it remained tough, the draft speech was materially refined and softened by White House aide Clark Clifford before its 10:00 p.m. delivery. As negotiations resumed on May 25, Truman delivered an extended version to Congress, urging approval to draft strikers. Even as Truman spoke, he was handed a note confirming a strike settlement. 311

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Impact of Event The deep issues involved in the strike conflict reasserted themselves over the following months and years. One such issue concerned the extent of, or limitations on, presidential powers. The issue had surfaced regularly during each of Franklin D. Roosevelt’s administrations. Truman’s proposal to use federal authority not only to break a strike but to do so by drafting strikers into the armed forces dramatically revived that issue. Although management and a majority of the public praised Truman’s toughness and his forceful display of public character, many of his associates, aides, and friends believed that his radio and congressional addresses were patently unconstitutional as well as intemperate. Stronger denunciations came from Truman’s former friends, Whitney and Johnston. Their views were echoed loudly by virtually every major U.S. labor leader. These leaders variously depicted the president as a dictator, a fascist, or a communist, vowing a complete withdrawal of their support. This was a predictable reaction considering that labor’s battles against hostile uses of federal authority were integral parts of labor history. Unions, at least until the mid-1930’s, not only had to contend with masses of antilabor legislation but also had been obliged to fight for their existence against the government’s employment or support of strikebreaking court injunctions, judicial repression of organizing and strike tactics through dubious applications of the Sherman Act, federal resort to the Army to quell labor disturbances, and government prosecution and imprisonment of labor leaders. Reforms embodied in the National Labor Relations Act (1935) and other prolabor legislation during the 1930’s were of too recent vintage in 1946 to erase such memories. Broader than the issue of presidential power, therefore, was the issue of what role government should play, if any, in critical disputes between management and labor. This in turn was just one part of a more general and widely discussed question about the role of government in the economy as a whole. Immediately after settlement of the rail strike, there were two related matters before Congress: Truman’s earlier proposal for a mandatory cooling off period and specified fact-finding procedures before strikes occurred, and the counterpoint to this in the form of a conservative bill authored in February, 1946, by Representative Clifford Case of South Dakota. The Case bill called for a thirty-day cooling off period before a strike could take effect; the use of injunctions, particularly in regard to boycotts; and provisions to make both labor and management liable for breaching labor contracts. Each of these provisos sounded alarms in labor’s camp. The flow of the Case bill through Congress coincided with a series of 312

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national emergencies caused by conflicts between workers and management. Nationwide coal strikes and two seizures of that industry by presidential fiat were followed by Truman’s seizure of the country’s major meatpacking plants, oil producing and refining facilities, and tugboat and towing company equipment. Truman coped simultaneously with major steel, electrical, and auto industry strikes. These crises and responses exhausted patience—and often judgment—in all quarters. Reflecting popular sentiments, the congressional stance toward labor hardened. As might have been expected, the Case bill was sharper by the time it came under Senate consideration. It struck Truman as so antilabor that he vetoed the bill. The veto was sustained, but Truman did not regain the favor that he had lost among labor leaders by his handling of the railroad strike. The notion persisted inside and outside Congress that the National Labor Relations Act of 1935 (the Wagner Act) had tipped the bargaining scale too far to labor’s side. For decades before, lawmakers and the country at large had cried out for curbs on business trusts and would-be monopolies, pleas in time sanctified in legislation and eventually in judicial interpretations. This progress toward restraining management seemed only to have whetted the greed and monopolistic impulses of labor organizations. Justifiably or not, what presidents and Congress sought were viable formulas by which to right this apparent imbalance, which now appeared overly favorable to labor. The Labor Management Relations Act (the Taft-Hartley Act) of 1947, coming hard on the labor tumult of 1946, appeared to be the most politic solution, although it would soon be contested bitterly as a “slave labor law,” and become a burning issue in the 1948 and 1952 presidential elections. The Taft-Hartley Act retained labor’s rights under the Wagner Act, but it juxtaposed to the list of prohibited “unfair” practices of management a corresponding list of “unfair” labor practices of unions. Bibliography Ayers, Eben A. Truman in the White House: The Diary of Eben A. Ayers. Edited by Robert H. Ferrell. Columbia: University of Missouri Press, 1991. Edited by a leading authority on Truman, this is a literate, intelligent, abbreviated account of the flow of events, rail strike included, during the Truman Administration. Needs to be supplemented, but useful. Many photos, useful index. Donovan, Robert J. Conflict and Crisis: The Presidency of Harry S. Truman, 1945-1948. New York: W. W. Norton, 1977. Accurate and detailed. Written by a national columnist. Superior to most academic works. Many photos, chapter notes, splendid index. 313

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Gosnell, Harold F. Truman’s Crises: A Political Biography of Harry S. Truman. Westport, Conn.: Greenwood Press, 1980. The author is a noted political scientist. The prose is uninspired but well organized. Chapter notes, useful bibliography, good index. Chapter 22 pertains to the railroad strike and its context. McCullough, David. Truman. New York: Simon & Schuster, 1992. Overwritten and duplicative of many other works on Truman and his presidency. The writing falls below the standard of McCullough’s usually exciting prose. A weighty synthesis worth reading by those who previously knew little of Truman’s presidency. Many photos, source notes, fine bibliography, and index. Miller, Merle. Plain Speaking: An Oral Biography of Harry S. Truman. New York: Berkley, 1974. Miller’s observations are acute and affectionate. Much on Truman’s special knowledge of railroads. Good index. Miller, Richard Lawrence. Truman: The Rise to Power. New York: McGraw-Hill, 1986. Excellent reading, accurate and informative. Fine background on Truman’s experience and character, including his understanding of railroad labor problems in pre-White House days. Photos. Excellent notes replace bibliography. Truman, Harry S. Year of Decisions. Vol. 1 in Memoirs. Garden City, N.Y.: Doubleday, 1955. Inimitable Truman, pithy and deceptively straightforward. Good perspectives on the strike wave, the railroad strike, and presidential reactions. Good index. Refreshing and invaluable. Clifton K. Yearley Cross-References The Railway Labor Act Provides for Mediation of Labor Disputes (1926); The Wagner Act Promotes Union Organization (1935); Roosevelt Signs the Fair Labor Standards Act (1938); Roosevelt Signs the Emergency Price Control Act (1942); The Taft-Hartley Act Passes over Truman’s Veto (1947).

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THE TRUMAN ADMINISTRATION LAUNCHES THE MARSHALL PLAN The Truman Administration Launches the Marshall Plan

Categories of event: International business and commerce; government and business Time: June 5, 1947 Locale: Harvard University, Cambridge, Massachusetts Through the Marshall Plan, the United States helped resolve European political and economic problems after World War II, greatly aiding European industrial recovery in the process Principal personages: Harry S Truman (1884-1972), the president of the United States, 1945-1953 George C. Marshall (1880-1959), the U.S. secretary of state, 19471949 William L. Clayton (1880-1966), the undersecretary of state for economic affairs Dean Acheson (1893-1971), the secretary of state, 1949-1953, and undersecretary of state, 1945-1947 George F. Kennan (b. 1904), a member of the Department of State policy and planning staff Paul G. Hoffman (1891-1974), a chief Marshall Plan administrator Summary of Event The Marshall Plan was officially announced by Secretary of State George C. Marshall in the course of a commencement speech at Harvard 315

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University on June 5, 1947. Although the plan bears the name of its announcer, it had been devised by a team of experts within the administration of President Harry S Truman, including William L. Clayton, George F. Kennan, and Dean Acheson. Marshall’s speech was a proposal for a massive aid package for the war-ravaged economies of Europe. The idea behind the aid was that if the United States assisted the European countries, Europe’s economic problems would be resolved, leading to political stability. The plan registered as a definite political success but produced fewer results than hoped for in terms of specific American economic objectives. From a political point of view, it was not easy to persuade the American public to invest about $13 billion in European reconstruction. The United States already had refused to extend massive aid during the two years since the end of World War II. The deteriorating European economic and political situation, coupled with possible further Soviet encroachment in Eastern Europe, led the Truman Administration to assume all the political risks involved in such an aid program. Europe’s situation appeared to be slipping out of control by the spring of 1947. Although the Western European economies had made considerable steps toward recovery between the end of the hostilities and the beginning of 1947, long-term structural problems, particularly with regard to international payments, were far from resolved. The European countries’ chief problem consisted of large foreign account deficits and the lack of sufficient gold or gold-convertible currency reserves to cover outstanding foreign debt. These countries found it difficult to buy raw materials and equipment deemed necessary to the recovery process. In addition, unsatisfied consumer demand fueled powerful inflation. Unless the Europeans could obtain large foreign credits, their recovery process would come to a standstill. The United States-sponsored International Monetary Fund (IMF), created in 1944, had extended some of the needed funds, but it was not endowed with much capital. Massive American aid, Marshall Plan proponents argued, would provide the necessary funds to help achieve the most important IMF goal: a multilateral trade and payments system based on convertible currencies and nearly free of governmental impediments such as tariffs. The international payments problem was coupled with a number of political predicaments. First, there was the problem of Soviet advances in Eastern Europe. The Truman Administration perceived that Stalin had embarked upon a program of Eastern European conquest. Moreover, in the spring of 1947, both the Greeks and the Turks had asked for American economic and military aid, the former to defeat Greek communist guerrillas, the latter to arm themselves against possible Soviet advances toward the 316

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Dardanelles strait. This call for aid had prompted the American president to announce his “Truman Doctrine,” which basically stated that the United States would provide economic and military aid to countries threatened by communism. Marshall Plan aid would therefore go hand in hand with the Truman Doctrine, as it would help stabilize the political situation in Europe by giving a boost to the economy. Once standards of living had improved, Europeans would be far less inclined, it was argued, to support communist parties. These anticommunist arguments secured congressional support for Truman’s policies. There was also the so-called “German problem,” itself tied to the question of communist containment. It appeared necessary to reinsert Germany into the European community of nations in order to transform it into a Western European democratic bastion against communism. If Germany had been severely punished with the burden of heavy reparations, as after World War I, it would not have been able to rebuild quickly and might have been vulnerable to the Soviets: Stalin might have stood with his Red Army along the Rhine, just across from France. Rebuilding and reinforcing Germany such a short time after the Nazi experience, however, was an extremely difficult political proposition. The Marshall Plan would help resolve that political difficulty by providing Western European countries, particularly Great Britain and France, with funds that the Germans themselves could not provide in the form of reparations. At the same time, Germany would receive aid, though in smaller amounts, and could thus be rebuilt rapidly. All the above-mentioned European economic and social problems were at the basis of Marshall’s commencement speech, which came with a warning: In order to ensure that American aid would be used efficiently, aid beneficiaries should integrate their economies. If the European One of the greatest successes of President Harry S economies were integrated, Truman’s administration was the Marshall Plan. Europe would enjoy all the (Library of Congress) 317

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benefits of capital and consumer markets as large as those of the United States. That would eliminate uncompetitive firms while favoring rationalization and regional specialization. Integration would also tie the European countries’ economies so tightly as to make old national conflicts disappear. Integration was to help bring Germany and its former enemies, particularly France, closer to each other than they had ever been. Integration could not happen randomly: It had to be planned. Marshall Plan beneficiaries were soon required to prepare national investment plans that presupposed integration with other European markets. At the same time, intra-European payments would be regulated by accords that would eventually lead to convertible currencies. In the end, the Western European economy would become internationally competitive and able to join the United States in promoting international free trade. The Marshall Plan was approved by Congress on April 13, 1948, as the European Recovery Program (ERP). It was to be administered by an independent agency, the Economic Cooperation Administration (ECA), headed by Paul G. Hoffman, a businessman who had been president of the Studebaker Automobile Company. Impact of Event The Marshall Plan had important effects on the reconstruction of Western Europe, especially from a political point of view, despite the fact that not all the Truman Administration’s original goals were achieved. European industry profited greatly. The ERP’s clearest success lay in the area of communist containment. Both in France and in Italy, where the Left was very strong at the end of World War II, the Communists were put on the defensive by 1948. Generally, economic hardship that might have aided the cause of communist parties was avoided. Marshall Plan funds were often used to appease political demands: They allowed for smaller tax levies, financial stabilization, relief of unemployment, and much-needed investment in capital equipment. With a strengthening of pro-American centrist forces, the private sector operated in a safer political environment, resulting in higher levels of business confidence. If the Marshall Plan was a success politically, there are some doubts concerning some of its specific economic goals. It is undeniably true that most Western European countries increased production spectacularly between 1948 and 1951 and became far better able to compete internationally. By 1951, however, the European countries’ balance of payments with the dollar area was still in the red, and the United States had to continue to send aid, particularly military aid, after the outbreak of the Korean War. Moreover, little integration of the Western European economies had 318

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been achieved by 1951. Originally American planners had hoped to create a fully integrated single market, perhaps operating under a single currency. By 1951, the European economies were still essentially following national economic development plans. An intra-European payments bloc had been created to simplify the payments mechanism within Western Europe, but this did not lead to European currencies’ convertibility, as originally sought by the Americans. Marshall Plan administrators were only moderately successful in their efforts to influence European countries’ economic policies. Western European countries had national agendas that, by and large, they did not abandon in the name of integration or other ERP goals. For example, the British continued with full employment policies, even when that meant withdrawing Great Britain from nearly all American-sponsored intra-European trade and payments integration schemes. In France, authorities did not scale down massive investment plans for economic modernization, even when investment caused inflation, one of the principal economic woes that Marshall Plan officials were attempting to eradicate from Europe. The German problem itself was resolved more through Franco-German haggling than through the Marshall Plan. After a series of disputes and negotiations, French and German administrations arrived at an accord, the European Coal and Steel Community (ECSC), for integrated Western European control over Ruhr Valley coal and steel. The ECSC dealt with only two commodities and resembled a cartel insofar as it was a marketsharing agreement. The United States accepted this arrangement and helped in the negotiating process, offering Marshall Plan aid to support it. The ECSC, despite its limits and cartel-like features, represented some degree of intra-European economic integration and, more important, marked a rapprochement between France and Germany that planted the seeds of the future European Economic Community. Western European politics led the Americans to tone down their expectations throughout the 1948-1950 period. In the end, American politicians chose to uphold their political priorities and sacrifice some of the more specific economic goals. It became increasingly apparent that in order for the ERP to succeed, American goals had to be adapted to fit Western Europe’s hard political realities. European industry generally profited from the ERP. Businesses that had experienced difficulties in importing, producing for export, and obtaining credit found that once technologically sound and innovative projects were presented, ERP provisions made available the needed equipment and raw materials, or loans at favorable terms. In some cases, businesses also modernized their outlook through ERP technical assistance and productiv319

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ity programs. In countries such as West Germany and Great Britain, though less so in France and Italy, American-sponsored non-communist trade unions helped improve industrial relations. Business leaders also cooperated with their governments in devising ERP policy. In part, the effectiveness of business “re-education” programs depended on the fact that the ECA was staffed by many forward-looking American business leaders. Besides Paul Hoffman, these included Thomas K. Finletter of Coudert Brothers; David K. Bruce, a businessman from Baltimore; James D. Zellerbach of the Crown Zellerbach Corporation; and James G. Blaine of Midland Trust Company. These men criticized their European counterparts but also sought to persuade them, at times successfully, about corporate management methods. Generally, the anti-communist guarantees provided by the United States’s presence in Western Europe allayed entrepreneurs’ fears and contributed to a more positive investment psychology. By the early 1950’s, despite the lack of effective integration or a definitive solution to the payments problems, the private sector was thriving and helping propel Western Europe to high rates of economic growth. Bibliography Diebold, William. Trade and Payments in Western Europe: A Study in Economic Cooperation, 1947-1951. New York: Harper & Brothers, 1952. One of the best basic studies on Western European efforts to create an intra-European trade and payments system after World War II. Much attention is devoted to the role played by Marshall Plan aid in helping to create that system. Gimbel, John. The Origins of the Marshall Plan. Stanford, Calif.: Stanford University Press, 1976. Directly tackles the difficult question of which goals were considered most important by Truman Administration officials as they devised a policy for the reconstruction of Western Europe. Gimbel takes into account not only economic goals but also strategic ones, with particular regard to the Franco-German settlement. Hogan, Michael J. The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947-1952. Cambridge, Mass.: Cambridge University Press, 1987. Hogan’s work is based on extensive documentation found in American and British archives. It poses the question of Marshall Plan success by arguing that the United States sought above all to transplant into Europe a neocorporatist economic model that had emerged in America through New Deal and World War II experiences. Hogan concludes that the Western European countries absorbed much of this model by adapting it to their own political and economic realities. 320

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Milward, Alan S. The Reconstruction of Western Europe, 1945-1951. Berkeley: University of California Press, 1984. The most comprehensive study to date concerning the origins of European economic integration. Milward stresses the failures of American initiatives and shows that Marshall Plan aid was used by the Western European countries mainly to carry out their own national agendas. Wexler, Imanuel. The Marshall Plan Revisited: The European Recovery Program in Economic Perspective. Westport, Conn.: Greenwood Press, 1983. A thorough and well-informed inquiry into the economic impact of the Marshall Plan in Europe. Wexler concludes that although not all of Western Europe’s economic problems were solved by the ERP, the Marshall Plan was instrumental in assisting Europe to achieve spectacular economic growth. Chiarella Esposito Cross-References The General Agreement on Tariffs and Trade Is Signed (1947); The Agency for International Development Is Established (1961); The United States Suffers Its First Trade Deficit Since 1888 (1971); The North American Free Trade Agreement Goes into Effect (1994).

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THE TAFT-HARTLEY ACT PASSES OVER TRUMAN’S VETO The Taft-Hartley Act Passes over Truman’s Veto

Category of event: Labor Time: June 23, 1947 Locale: Washington, D.C. Superseding the prolabor Wagner Act, the Taft-Hartley Act invoked federal authority to restore a more popularly acceptable balance of power between management and unions Principal personages: Harry S Truman (1884-1972), a Democratic president who vetoed the Taft-Hartley Act Robert A. Taft (1889-1953), a leading Republican senator who helped sponsor the act John L. Lewis (1880-1969), a United Mine Workers leader Summary of Event The Taft-Hartley Act of 1947 represented a national reaction against the presumed excess of power wielded by labor unions in the aftermath of World War II. By 1946, it was widely believed that the labor reforms of Franklin D. Roosevelt’s administrations had pushed prolabor legislation too far and had unbalanced the operations of a competitive marketplace. Informed by vocal interest groups, a popular consensus developed around the notion that the existing statutory rules governing collective bargaining ignored the rights of employers, vitiated the rights of individual workers (notably those uninterested in joining unions), and jeopardized the public interest. These opinions were strongly reflected in the dominant mood of the Eightieth Congress, the members of which were overwhelmingly conservative and overwhelmingly Republican. 322

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Specifically, many members of Congress believed that the time had come for amendment of the Norris-LaGuardia Act of 1932, which deprived the federal courts of jurisdiction over most labor disputes, removed unions from subjection to the antitrust legislation of the Sherman Act and the Clayton Act, and ensured unions’ freedom to employ the full gamut of their organizing weapons to secure collective bargaining. Similar views extended to operations of the National Labor Relations Act (the Wagner Act) of 1935, which threw the authority of the federal government behind workers’ right to select unions of their own choosing and to bargain collectively with employers. Employers, whose businesses were still targets of antitrust legislation, were further constrained by the act’s delineation of practices deemed unfair to labor. Hostility toward labor that manifested itself in Congress also appeared to characterize several dramatic moves by the Democratic administration of President Harry S Truman. Anomalously, through most of his political career Truman had been a reliable ally of organized labor. Truman had won support from the leaders of railroad unions, but these relationships were ruptured abruptly when an irate Truman ordered federal seizure of the railways and threatened to draft striking workers into the armed forces during the nationwide railroad strike of 1946. The rail strike was only one of a series of labor explosions that the president and the country had had to confront in an uncertain postwar economy. Soaring prices tended to cancel workers’ wartime wage gains. Corporate profits were the highest in history, and a massive wave of mergers raised new fears of monopoly. Organized labor’s response was to demand higher wages. Some unions, such as John L. Lewis’ United Mine Workers (UMW), went further, demanding employer-financed health and welfare benefits. Although employment had reached new heights and the number of work stoppages was modest, crippling strikes erupted between 1945 and 1947 in critical industries including steel, railways, automobiles, electrical goods, rubber, meatpacking, and coal mining. Moreover, these strikes and the threat of others were complicated by shutdowns resulting from union jurisdictional disputes provoked by feuds between the American Federation of Labor (AFL) and the Congress of Industrial Organizations (CIO). Controlling Congress for the first time in twenty-eight years, the Republican Party, through one of its principal leaders and a presidential hopeful, Senator Robert A. Taft of Ohio, determined to capitalize on an individualistic nation’s antipathies toward seemingly strident dictatorial labor leaders and the unions they represented. Taking his cues from a manifesto of the National Association of Manufacturers, Taft became a spokesman for those who sought to curtail what were widely regarded as labor’s own unfair 323

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practices: secondary boycotts (encouraging others not to trade with a particular business), refusals to bargain or failures to bargain in good faith, violations of contracts, the overt use of coercion against nonunion workers to force them into unions, demands for the closed (or all-union) shop, “featherbedding” (creating jobs or making jobs simpler to add to union membership or benefit members), and jurisdictional strikes. Taft and his fellow Republicans were eager to win political advantage over a Democratic president mired in attempts to deal with a Lewis-led UMW strike and already at odds with labor leaders for what they perceived as Truman’s mishandling of the rail strike. Such was the climate of opinion in which Congress passed the TaftHartley Act on June 20, 1947, amending the Norris-LaGuardia Act and the Wagner Act in a number of important ways. Taft-Hartley largely restored employers’ freedom to hire and fire workers regardless of union membership. The act consequently severely limited, it if did not entirely void, unions’ chances of winning the closed shop. Internal union discipline was impaired by a provision that union members could be dropped from membership only because of nonpayment of dues, thus opening the door to employers’ deployment of antiunion provocateurs, spies, and “stool pigeons” within union ranks. The act further placed under proscription a lengthy list of unfair practices by labor. Vigorous union recruiting measures, particularly during elections to determine workers’ choices of bargaining agents, were banned. Union ultimatums to employers were banned, as were union efforts to persuade employers to discriminate in favor of union workers. The checkoff system, whereby employers deducted union dues from workers’ wages, was abolished. Under many circumstances, secondary and jurisdictional strikes and boycotts were proscribed, and when they were threatened they could be held in abeyance by court injunctions. Similarly, strikes affecting interstate commerce, which conceivably meant strikes in most industries, were subjected to the delay of eighty-day “cooling off” periods, after which the president could secure a court injunction. Unions were made subject to civil suit for damages to employers’ interests, caused by unfair practices. Especially galling to organized labor was the provision that before the act’s administrative agency, the National Labor Relations Board (NLRB), would hear union appeals, union officials were required to take an oath that they neither were communists nor were affiliated with communist organizations. In addition, union files, finances, and the methods by which union officers were elected were thrown open to government scrutiny. Stringent restrictions were imposed on union political activities and political contributions in federal elections. 324

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Siding with labor, whose support he was eager to regain, as well as capitalizing on doubts about the act even among its sponsors, President Truman vetoed the Taft-Hartley Act on June 20, 1947. As Truman probably expected, given the strong votes favoring it in Congress, the measure was passed over his veto, three days later. The act’s hundreds of specific provisions covered in twenty pages of fine print thus became the nation’s principal labor law. Impact of Event President Truman and labor leaders alike condemned the Taft-Hartley Act bitterly. Truman argued that it would sow seeds of discord that would plague the nation’s future, that it created an unworkable administrative structure, that it complicated collective bargaining, and that it made no contribution to the resolution of complex labor-management problems. The sentiments of union leaders were summed up by their description of TaftHartley as a slave labor bill that threatened to eviscerate their major gains of the preceding fifteen years. Considering the national uproar generated by the act, it was to be expected that it became an important issue in the national elections of 1948 and 1952. More than being an electoral issue, it also became a touchstone for determining one of the bounds between liberals and conservatives, friends of labor and enemies of labor, and champions of business and critics of business. In the light of the heated debates and dire predictions attending TaftHartley’s enactment, the subsequent history of the act’s operation was markedly placid. With organized labor’s support, Truman was reelected in 1948. Strong labor unions continued to grow stronger over the next two decades, with nearly 1.5 million workers becoming union members in the South alone during the 1950’s. Unions grew at a slower rate than in the previous decade, but there were many explanations for this in addition to the effects of Taft-Hartley. Within two years after Taft-Hartley’s enactment, it had become clear that both organized labor and employers were managing to live with provisions of the act. Judged by the number of employer appeals to the NLRB about the unfair practices of unions, employers were far less interested in using Taft-Hartley to suppress organized labor than congressional and other political battles had indicated. In 1949, for example, nine-tenths of the appeals filed with the NLRB came from unions rather than from employers. Union leaders acted swiftly to exploit the Taft-Hartley’s gray areas and loopholes. One provision of the act stipulated that workers’ refusal to stay on the job because of “abnormally dangerous conditions” did not constitute a strike, so unions claimed dangerous conditions when they wanted workers 325

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off the job. Furthermore, since employers could sue unions for violations of Taft-Hartley’s no-strike provision, unions simply demanded that new contracts with employers omit the no-strike pledges from the work force. John L. Lewis, whose UMW had been released from federal control on June 30, 1947, negotiated mine operators into acceding to a new contract proviso that miners would work while they were “able and willing.” Lewis was also in the forefront of labor leaders’ bitter fight against Taft-Hartley’s imposition of a noncommunist oath. A few unions were controlled by communists, but the vast majority were not. Labor leaders were furious that on questions of loyalty they, and not employers, were being singled out. Although a number of unions reluctantly acceded to oath requirements, hoping to placate the NLRB and public opinion, Lewis, a staunch Republican himself, adamantly refused. The NLRB overruled its own general counsel by dropping the oath requirement. Taft-Hartley’s almost universal ban on union political activities, particularly the ban on union political expenditures, was fought by being ignored pending resolution by the nation’s courts of the issues involved. The AFL initiated, as a subterfuge, voluntary fund-raising campaigns among union members that were designed to ensure the political defeat of Senator Taft and those politicians who had supported him. As it transpired, a circuit court decision in March, 1948, pronounced the Taft-Hartley ban on political activity unconstitutional. Loopholes were widened when the United Auto Workers (UAW) negotiated contracts exempting it from several of the act’s restrictions and several other unions won “no-liability” contracts from employers that removed them from dangers of employer-filed civil suits for unfair practices. The remainder of 1947 after passage of Taft-Hartley was relatively free of major strikes. Serious stoppages recurred in early 1948, however, providing important challenges to the act. One major stoppage involved the UMW, led by John L. Lewis. When negotiations between Lewis and mine operators over the pending 1949 contract remained unsettled, Lewis, without calling a strike, nevertheless engineered a work slowdown. When operators, in turn, refused to contribute to the UMW welfare fund—as Taft-Hartley permitted them to do—Lewis called a full strike. A federal injunction sanctioned by Taft-Hartley was swiftly issued. Lewis ordered the men back to work, but many refused. Lewis, in company with twenty other UMW officials, subsequently was charged with contempt. A federal district court on March 2, 1950, exonerated the union officials. On March 3, President Truman called upon Congress for authorization to seize the mines and channel their profits into the U.S. Treasury. Within hours, the strike was resolved in a compromise favoring the UMW. There would be six other 326

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occasions in 1948 alone in which the president would invoke Taft-Hartley’s national emergency provisions to force resolution of strikes, or threats of strikes, that were against the public interest. Taft-Hartley, on balance, did not bring peace between management and labor. Both sides continued to fault the act, the former because it did too little to curb the monopoly power of unions, the latter because it was excessive and discriminatory in regulating unions. The act did involve the federal government in guiding and controlling certain activities of both employers and unions in discrete ways, a trend strengthened by the LaborManagement Reporting and Disclosure Act of 1959 (the Landrum-Griffin Act). Bibliography Cox, Archibald. Law and the National Labor Policy. Los Angeles: Institute of Industrial Relations, University of California, 1960. An excellent, readable survey of events and policies leading to Taft-Hartley. Notes and a usable index. Donovan, Robert J. Conflict and Crisis: The Presidency of Harry S. Truman, 1945-1948. New York: W. W. Norton, 1977. A fine, informative book. Chapter 33 is excellent on Truman’s reaction to Taft-Hartley. The entire book provides a splendid context for post-1945 labor problems. A few photos, useful chapter notes, and index. Gregory, Charles O. Labor and the Law. 2d rev. ed. New York: W. W. Norton, 1961. An excellent and authoritative survey of the subject. Valuable on the first decade of Taft-Hartley’s impact and complications. Some notes, brief bibliography, and good index that includes cases. A fine introduction for lay readers. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Lee, R. Alton. Truman and Taft-Hartley. Lexington: University of Kentucky Press, 1966. Scholarly and detailed. A bit turgid, but invaluable. Notes, modest bibliography, and useful index. Northrup, Herbert R., and Gordon F. Bloom. Government and Labor: The Role of Government in Union-Management Relations. Homewood, Ill.: Richard D. Irwin, 1963. Chapters 4 and 5 discuss Taft-Hartley’s content, meaning, and implications and provide an appraisal. Detailed and informative. Page notes, chapter bibliographies, table of cases, and name and subject indexes. Wilcox, Clair. Public Policies Toward Business. Homewood, Ill.: Richard D. Irwin, 1966. Strong on businesses’ required adaptations to TaftHartley. Chapter 32 on government and labor is especially informative 327

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on Taft-Hartley as an extension of government’s intervention in the economy. Many page notes and brief chapter bibliographies. A valuable synthesis. Clifton K. Yearley Cross-References The Railway Labor Act Provides for Mediation of Labor Disputes (1926); The Norris-LaGuardia Act Adds Strength to Labor Organizations (1932); The Wagner Act Promotes Union Organization (1935); The CIO Begins Unionizing Unskilled Workers (1935); Roosevelt Signs the Fair Labor Standards Act (1938); Truman Orders the Seizure of Railways (1946); The Landrum-Griffin Act Targets Union Corruption (1959).

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THE GENERAL AGREEMENT ON TARIFFS AND TRADE IS SIGNED The General Agreement on Tariffs and Trade Is Signed

Category of event: International business and commerce Time: October 30, 1947 Locale: Geneva, Switzerland The General Agreement on Tariffs and Trade (GATT) set basic rules under which open and nondiscriminatory trade can take place Principal personages: Cordell Hull (1871-1955), the initiator of the idea of GATT; the U.S. secretary of state, 1933-1944 John Maynard Keynes (1883-1946), a British economist and negotiator in wartime talks James Edward Meade (1907-1995), a British economist and public official, one of the originators of the movement for an international trade organization Lionel Charles Robbins (1898-1984), an economist and public official who represented Great Britain in GATT talks Summary of Event On October 30, 1947, representatives of twenty-three countries, meeting in Geneva, Switzerland, signed the General Agreement on Tariffs and Trade (GATT) to reduce trade barriers among signatory nations. GATT was an attempt to combat the rise of worldwide protectionism that had preceded World War II. By providing a set of rules for open and nondiscriminatory trade and a mechanism to implement these rules, GATT sought to create an institutional framework within which international trade could be conducted as stably and predictably as possible. 329

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When the Great Depression set in, the U.S. Congress passed the highly protective Smoot-Hawley Tariff Act in 1930, raising average tariff rates on imports almost 60 percent. Great Britain passed the Import Duties Act in 1932, abandoning its traditional free trade policy. Other countries responded with restrictive import policies in self-defense. The result was a downward spiral in international trade, with the volume of trade in manufactured goods declining by 40 percent by the end of 1932. The U.S. view on international trade began to change after the Democratic victory in the presidential election in 1932. The new secretary of state, Cordell Hill, strongly favored U.S. leadership in arresting the worldwide protectionist wave. He was convinced that the elimination of trade barriers was the best means of reversing the downward spiral in international trade, which would in turn allow higher standards of living for all countries and promote lasting peace. After several years of his intensive lobbying, the Reciprocal Trade Agreements Act (RTA Act), an amendment to the Smoot-Hawley Act, was passed in 1934. The RTA Act empowered the president, for a period of three years, to initiate trade agreements on the basis of reciprocal tariff reductions. Reductions of U.S. tariffs were limited to 50 percent. The RTA Act was extended several times. The United States concluded agreements with twenty-nine countries on the basis of mostfavored-nation treatment before the outbreak of World War II. The idea of negotiating reciprocal tariff reductions, embodied in the RTA Act, was the conceptual basis for GATT. Soon after the United States entered World War II, the Allied nations, particularly the United States and Great Britain, started discussion on postwar trade and monetary issues. The discussion led to the Bretton Woods Conference in July, 1944, at Bretton Woods, New Hampshire. This conference established the charters of the International Monetary Fund and the International Bank for Reconstruction and Development (commonly known as the World Bank) to deal with international monetary issues. It also recognized the need for a comparable institution focusing on trade to complement the monetary institutions. Negotiations on the form and functions of an International Trade Organization (ITO) were first held on a bilateral basis between the United States and Great Britain. The United States pressed for nondiscrimination, whereby no country is favored over others; Great Britain insisted on continuation of its Imperial Preference, under which British goods receive preferential access to the markets of its former colonies and vice versa. A compromise was reached, and the results of those bilateral negotiations were published in November, 1945, in the Proposals for Expansion of World Trade and Employment. The United States expanded those proposals into a draft charter for the ITO in 1946. The charter was amended in 330

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successive conferences from 1946 to 1948 in London, New York, Geneva, and Havana. The final version of the ITO charter, known as the Havana Charter, was drawn up in Havana on March 4, 1948. The charter, which represented a series of agreements among fifty-three countries, never came into effect because most countries, including the United States, failed to ratify it. At the same time that the United States published the proposals, it invited several countries to participate in negotiations to reduce tariffs and other trade barriers on the basis of principles laid out in the proposals. The United States proposed to integrate all individual treaties into a multilateral treaty. GATT was thus drawn up as a general framework for rights and obligations regarding tariff reductions for twenty-three participating nations. GATT came into being before the Havana Conference but in accordance with the draft charter for the ITO that was currently under discussion. It was originally envisaged as the first of a number of agreements that were to be negotiated under the auspices of the ITO. It was supposed to be a provisional agency that would go out of existence once the ITO was established. The power and the bureaucratic size of the proposed ITO faced strong opposition in the U.S. Congress. Consequently, the Havana Charter was not put before the U.S. Senate for ratification for fear of its defeat. When it was clear that the United States would not ratify the Havana Charter, GATT became by default the underpinning of an international institution, assuming part of the commercial policy role that had been assigned to the ITO. Technically speaking, GATT is not an organization of which countries become members but a treaty among contracting parties. As a multilateral agreement, GATT has no binding authority over its signatories. When countries agree to GATT, they are expected to commit to three fundamental principles: nondiscrimination, as embodied in the most-favored-nation clause (all countries should be treated equally); a general prohibition of export subsidies (except for agriculture) and import quotas, from which developing countries are exempted; and a requirement that any new tariff be offset by a reduction in other tariffs. Impact of Event The agreement itself was without precedent. No agreement had ever been completed before GATT that included more countries, covered more trade, involved more extensive actions, or represented a wider consensus on commercial policy. It provided a promising contrast to the record of failures to liberalize trade that had characterized the years between the two world wars. Among the twenty-three participating countries, 123 bilateral negotia331

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tions occurred. The United States was a party to 22 of them, and the remaining 101 took place among the other members of the group. The signatory nations accounted for more than three-fourths of world trade, and negotiations covered two-thirds of trade among member nations. Tariff was reduced on about fifty thousand items, accounting for about half of world trade. Average tariff rates were cut by about one-third in the United States. By 1950, average tariffs on dutiable imports into the United States had fallen by about 75 percent as compared to Smoot-Hawley levels. GATT is a remarkable success story of an international organization. Over the years, it has provided the framework for an open trade system and a set of rules for nondiscrimination and settlement of international trade disputes. From 1947 to 1979, seven “rounds” of trade negotiations were completed under GATT auspices: in 1947 (Geneva), 1949 (Annecy, France), 1951 (Torquay, the United Kingdom), 1956 (Geneva), 1960-1961 (Geneva, the “Dillion Round”), 1962-1967 (Geneva, the “Kennedy Round”), and 1973-1979 (Tokyo). An eighth session began in 1986 (the “Uruguay Round”) and ended in December, 1993. The tariff reductions in rounds two through five were minimal. The volumes of trade covered by the fourth and fifth rounds were only $2.5 and $4.9 billion. The Kennedy Round (1962-1967) and the Tokyo Round (1973-1979) resulted in significant economic benefits to all major trading nations. Significant progress toward free trade among market economy (nonsocialist) countries in manufactured and semimanufactured goods was accomplished in the Kennedy Round. The value of trade covered in these negotiations among forty-eight countries was $40 billion. Duties were cut on average by 35 percent spreading over the broadest set of products (sixty thousand) to date, with some cuts made on almost 80 percent of all dutiable imports. By the conclusion of this round, the weighted average tariff rate of the United States was 8.3 percent, that of the original six European Economic Community (EEC) countries was 8.3 percent, that of the United Kingdom was 10.2 percent, and that of Japan was 10.9 percent. PostKennedy Round tariffs in industrial countries averaged 8.7 percent. For the first time, an agreement was reached to resolve conflicts over nontariff barriers, particularly elimination of import quotas on almost all nonagricultural products. In some cases, tariffs were completely eliminated, as for tropical food products from developing countries. Developing countries played a minor role in negotiations and were not subject to significant tariff reductions. The Tokyo Round was negotiated by ninety-nine countries and covered $155 billion in trade. The average tariff cut was about 34 percent. By the conclusion of this round, the weighted average tariff rate on finished and 332

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semifinished manufactures of the United States was 4.9 percent, that of EEC countries was 6.0 percent, and that of Japan was 5.4 percent. PostTokyo Round tariffs among industrial countries stood at an average of 4.7 percent. The Tokyo Round negotiations resulted in the first comprehensive agreement on reducing nontariff barriers such as quotas. The Tokyo Round failed to reach agreements on a safeguard code and on eliminating heavy restrictions on trade on agricultural products. The most complex and ambitious round, the Uruguay Round, was launched by ninety countries on September 20, 1986, in Punta del Este, Uruguay. Originally scheduled to be completed by the end of 1990, the Uruguay Round was aimed at the further liberalization and expansion of trade. It sought to extend GATT principles to new sectors (agriculture, services), improve their application to old sectors (textiles, garments), reexamine old issues (safeguard protections), and embrace new issues such as intellectual property, with discussion of copyrights, computer software, and patent protection. By early 1993, no agreement had been reached because of disputes between the European Community and the United States regarding agricultural subsidies. Various compromises resulted in an agreement in December. As of 1993, GATT was subscribed to by 108 nations that together accounted for 90 percent of world trade. It had emerged as the central forum for multilateral trade negotiations. Nine-tenths of the disputes brought to GATT had been settled satisfactorily. Average tariffs in the industrial countries averaged less than 5 percent, down from an average of 40 percent in 1947. The volume of trade in manufactured goods had multiplied twentyfold. Despite these successes, the credibility of GATT was undermined by the difficulty of reducing nontariff barriers and exemption of several important sectors from application of GATT principles. In 1989, one-third of world trade, mainly in financial services, agriculture, and textiles and apparel, was not covered. Successful completion of the Uruguay Round was expected to bring many of these sectors under GATT rules and boost world trade by $200 billion a year. Bibliography Bhagwati, Jagdish. The World Trading System at Risk. Princeton, N.J.: Princeton University Press, 1991. The author is an ardent supporter of GATT. This book contains a collection of his lectures, which make a case for the continuation of GATT-sponsored multilateral trade talks. Dam, Kenneth W. The GATT: Law and International Economic Organization. Chicago: University of Chicago Press, 1970. Excellent discussion of how legal rules have evolved in GATT. 333

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Gardner, Richard N. Sterling-Dollar Diplomacy: The Origins and the Prospects of Our International Economic Order. New expanded ed. New York: McGraw-Hill, 1969. Provides complete details of the preparatory work of ITO-GATT. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Jackson, John H. Restructuring the GATT System. New York: Council on Foreign Relations Press, 1990. Explores issues relating to future restructuring of GATT. Chapter 1 provides a brief but succinct history of GATT. _____. The World Trading System: Law and Policy of International Economic Relations. Cambridge, Mass.: MIT Press, 1989. An introductory text on trade law and policy within the background of international law, national law, and related disciplines, including economics and political science. Kock, Karin. International Trade Policy and the GATT 1947-1967. Stockholm, Sweden: Almqvist & Wiksell, 1969. A study of the interplay of foreign trade policies of GATT members and their cooperation in GATT. Tussie, Diana. The Less Developed Countries and the World Trading System: A Challenge to the GATT. New York: St. Martin’s Press, 1987. Studies GATT from the point of view of less developed countries, with particular focus on how they have been treated by the developed countries in GATT negotiations. Wilcox, Clair. A Charter for World Trade. New York: Macmillan, 1949. An excellent book on the history, provisions, and significance of the Havana Charter. The author represented the United States as chairman of its delegation at the conference in London and vice chairman of its delegations at Geneva and Havana. Baban Hasnat Cross-References The Agency for International Development Is Established (1961); The United States Suffers Its First Trade Deficit Since 1888 (1971); The North American Free Trade Agreement Goes into Effect (1994).

334

DINERS CLUB BEGINS A NEW INDUSTRY Diners Club Begins a New Industry

Category of event: Marketing Time: 1949 Locale: New York, New York By recognizing the untapped demand for a mobile credit vehicle, the founders of Diners Club turned the idea of credit cards into a viable and profitable industry Principal personages: Alfred Bloomingdale (1916-1982), an unsuccessful film producer and grandson of the founder of the Bloomingdale’s stores; one of the founders of Diners Club Francis X. McNamara (1925), the head of the unsuccessful Hamilton Credit Corporation whose financial difficulties with his company led to the founding of Diners Club Ralph Snyder, the attorney of McNamara’s Hamilton Credit Corporation, the third founder of Diners Club Summary of Event In 1949, three old friends, Alfred Bloomingdale, Francis X. McNamara, and Ralph Snyder, met for lunch at a popular New York restaurant near the Empire State Building. McNamara was the head of an unsuccessful finance company, Hamilton Credit Corporation, that had more than $35,000 in uncollectible receivables. The conversation turned to McNamara’s difficulties in collecting debts. One of McNamara’s clients would allow his poor neighbors to use his charge account with local merchants. He would later collect the principal that was charged and also a small fee. Although this sounded like an ingenious entrepreneurial idea, collecting debts from the poor was difficult; 335

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at that time, the gentleman in question owed Hamilton Credit Corporation more than $3,000. In discussing this concept, the three men found two flaws in the operation of McNamara’s customer. First, he was lending to the wrong people: The poor were less likely to pay back their debts. Second, he had to wait until his customers were in an emergency before they would come to him for credit. One of the men remarked that within one mile of where they sat were all the most important New York restaurants, many of which already operated their own credit systems for regular customers. Restaurants seemed to be the ideal market for a more universal credit system. At the time, large retailers already used “charge plates” to keep track of purchases made on the accounts of their customers. These were metal strips, similar to military dog tags, that were inserted into a machine and copied with carbon paper. The three men discussed the innovative idea of becoming financial intermediaries and issuing these cards to consumers themselves. They conceived of credit as a product to be sold, an end in itself rather than simply a means to an end. The credit card was to become the vehicle for selling such credit. Although there was no precedent for such a company, these entrepreneurs forged ahead with their vision. They talked to the proprietor of the restaurant at which they were eating and asked him how much he would pay for additional customers. He answered that they were worth 7 percent of their bills. This figure became the set discount rate for use of the card and the means of paying for the Diners Club operation. Yearly fees and interest rates for consumers were introduced later. At the beginning, the three founders faced a serious problem. Businesses wanted to see a large customer base before they would accept the card, and customers wanted to see a large number of businesses willing to accept the card before they would sign up. Diners Club persevered, convincing many New York City restaurants to accept the card. For a customer base, the company aimed at traveling salespeople who wanted to charge their meals. Bloomingdale returned to California and started a similar operation in Los Angeles called Dine and Sign. Three months later, as Diners Club began to show a profit, the three men decided to merge, and Diners Club became a nationwide organization. They soon extended their base of operations from restaurants into hotels, retail stores, and other establishments. In 1951, they created a franchise system and went international, extending into Europe. The first Diners Club cards were more books than cards. Each person who signed up for the card was sent a book describing the places that accepted the card. To publicize new restaurants, a regular publication was issued to consumers. 336

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After eight years of a Diners Club monopoly, other cards, such as Carte Blanche and American Express, entered the market. Other things also changed. The 7 percent set discount rate became variable based on the size of the average purchase at each location. Diners Club also began issuing insurance and gave loans of up to $25,000 on the card. Credit card operations need a large amount of credit themselves to be able to extend credit to customers. Therefore, as business grew, the three founders of Diners Club found themselves constantly searching for more credit. Early in the business, they used what is referred to as the “float.” Since they had offices in both New York and Los Angeles, they paid the New York bills with checks drawn off the Los Angeles account and vice versa. Because checks took a few days to clear, they gained some time before needing money in the accounts. As time progressed, banks became quicker at check clearing, and this avenue of free credit disappeared. As the company grew rapidly, a large influx of capital was necessary. To finance the company, Bloomingdale and Snyder went public. They each held on to 30 percent of the shares, and the other 40 percent were sold. McNamara had already sold his portion of the business to the other partners. As Diners Club became more successful, banks fought for the privilege of lending money to the company, so the difficulty in finding credit disappeared. Other problems began to arise. Some customers simply did not pay their bills on time. Diners Club also sent unsolicited cards through the mail to increase its customer base, and some of these cards were lost or stolen and then used. No one could be found to hold responsible for these purchases, and Diners Club ended up paying. The practice of sending unsolicited cards later became illegal, insulating the credit card industry from incurring such losses. The company continued to operate profitably. In 1970, it was purchased by Continental. While under Continental’s control, Diners Club became the first card accepted in China. In 1980, the company again was sold, this time to Citibank. It still aimed primarily at the business traveler market, competing primarily with Carte Blanche and American Express. Although it holds a relatively small market share, Diners Club holds a large place in the history of the credit card industry. Impact of Event The main impact of the founding of Diners Club was the multibillion dollar global industry that followed. Although Diners Club was the first modern credit card, the concepts underlying this new industry had existed for a long time. Rather than introducing radically new ideas, the founders of Diners Club merely combined already well-known techniques for extending credit and created a new, mobile, credit card. 337

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The Diners Club card influenced the society of the 1950’s by crossing product and store lines. This card was universal rather than product- or store-specific. Although many oil companies and retail stores issued their own credit instruments, they were usable only at outlets owned by the issuer. Diners Club introduced the novel idea of a card that could be used at any one of a number of different establishments for a variety of products, from dinner at a restaurant to goods in a retail store. Innovations in the credit card industry came slowly. Technological advances usually were borrowed from other industries rather than created specifically for credit card usage. For example, neither satellite transmission nor computer authorization codes were invented for the credit card industry but were put to good use by it. The credit card industry thus influenced technology by offering a new outlet for innovative products and methods. The use of credit cards has become a vital part of many banks’ business. Credit card use is seen in a more positive light in the United States than in other countries, and most credit card issuing banks are located there. In 1952, after two full years of operation, Diners Club showed a profit of $61,222 on sales of $6.2 million. By 1986, 55 percent of all U.S. households held at least one credit card. Charge volume for the big three cards—Visa, Mastercard, and American Express—totaled more than $107 billion. This enormous growth in the credit industry has allowed consumers to purchase more goods and services than they dreamed possible. By allowing consumers to spread their debts over a long period of time but still allowing them to take home what they purchased, credit cards made it possible for consumers to live above their means. There is a negative side to such purchasing power. Many poorer families purchase more than they can afford to pay for by charging purchases to credit cards. When the bills become due, the families are unable to pay them, and the debt rolls over. Every time the debt is allowed to roll over, interest charges accrue. The debt thus becomes even more difficult to pay off. Banks have attempted to insulate themselves against this by issuing cards only to those consumers above an income cutoff. In the face of increasing competition, however, banks began lowering the limit on income drastically in the 1980’s. The credit card industry has been a peculiarly American development. Since the United States is so large geographically, as the population became more mobile, the personal trust that existed between merchants and their best customers eroded. It was this trust that enabled merchants to extend credit to customers. Customers needed a card that could be used across the nation, and retailers needed a third-party guarantor of the debt. Thus, the advent of the credit card industry affected the ability of consumers to leave 338

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their hometowns and still be able to purchase goods and services on credit. Another impact of the advent of Diners Club, and subsequent credit cards, is the ability of people to cross international borders without the need to carry large amounts of cash to exchange. World travelers found their credit cards accepted at many locations outside their country of origin, making traveling easier. When Diners Club and its competitors first introduced credit cards, merchants rejected the idea for two reasons. First, they did not wish to pay the 7 percent discount the card required. Second, they thought that the existence of a card that could be used at various establishments weakened their personal relationship with their customers. They soon found that the large increases in sales experienced by retailers who accepted credit cards more than made up for any loss of personalized service. Many customers will pass by a retailer who does not accept their credit card in order to purchase from one who does. This has led to an almost universal acceptance of most major credit cards. When Alfred Bloomingdale, Francis McNamara, and Ralph Snyder sat down to lunch in 1949, they could not have predicted the size and scope of the multibillion dollar global industry they were about to begin. In the span of less than fifty years, credit cards changed the face of worldwide business and extended buying power to more people. Bibliography Bagot, Brian. “Charged Up.” Marketing and Media Decisions 25 (April, 1990): 76-79. An in-depth comparison of the major credit card companies. Contains a section on Diners Club and discusses how Diners Club compares to the other large credit card companies. Hall, Carol. “Plastic Binge.” Marketing and Media Decisions 21 (April, 1986): 117-127. Good article on the state of the credit card industry. Informative chart on the spending patterns of credit card users. Comparison of Diners Club with other major credit cards. Hendrickson, Robert A. The Cashless Society. New York: Dodd, Mead, 1972. Discusses the future of a society that is no longer based on cash. Contains a chapter on the history of credit cards. Although it does contain some valuable information, it is written in a rather speculative, hypothetical manner. McManus, Kevin. “Wing Tips.” Forbes 130 (July 5, 1982): 150. When Braniff Airlines went bankrupt, many people were left holding tickets. This article discusses what Diners Club and the other major credit cards did for consumers who had used their cards to purchase Braniff tickets. Good discussion of the responsibilities of card-issuing companies. 339

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Mandell, Lewis. The Credit Card Industry: A History. Boston: Twayne, 1990. Discusses the history of the credit card industry, including a complete chapter on the founding of the Diners Club. The first book to focus primarily on the history of credit card usage. _____. Credit Card Use in the United States. Ann Arbor: Institute for Social Research, University of Michigan, 1972. Summarizes data from three nationwide surveys in 1970 and 1971 on specific uses of various cards, attitudes toward credit cards, and the incurrence of debt on credit cards. Contains a full copy of the survey used and data presented in clear, concise tables. “Playing Your Cards Right.” Consumer Reports 50 (January, 1985): 47-52. An excellent comparison of all the major credit cards. Concentrates on American Express, Visa, and Mastercard, but also includes data on Diners Club, Carte Blanche, and other smaller retail credit cards. “Serendipity.” Forbes 125 (February 4, 1980): 17. Discusses the international aspect of Diners Club. This article is about the entrance of Diners Club into the Chinese market, through Hong Kong. Details the visit of Continental chairman John B. Ricker, Jr., and his subsequent discussions that enabled Diners Club to be the first credit card company to enter the Chinese market. Sloan, Irving J. The Law and Legislation of Credit Cards: Use and Misuse. New York: Oceana, 1987. Although it does not discuss the history of credit cards, this book provides an interesting study of laws that relate to the industry. Contains appendices of specific state laws as well as an overview of federal regulations. Lewis Mandell Sarah Holmes Cross-References Congress Passes the Consumer Credit Protection Act (1968); Congress Passes the Fair Credit Reporting Act (1970); Congress Prohibits Discrimination in the Granting of Credit (1975); Congress Deregulates Banks and Savings and Loans (1980-1982).

340

THE FIRST HOMEOWNER’S INSURANCE POLICIES ARE OFFERED The First Homeowner’s Insurance Policies Are Offered

Category of event: New products Time: September, 1950 Locale: Pennsylvania The booming American economy following World War II forced the traditionally conservative insurance industry to innovate with new concepts such as the homeowner’s policy Principal personages: John Anthony Diemand (1886-1974), the president, chairman of the board, and chief executive officer of the Insurance Company of North America, 1941-1964 Bradford Smith, Jr. (1901-1988), a senior executive of INA who succeeded Diemand as president and continued his innovative policies Morgan Bulkeley Brainard (1879-1957), the president of the Aetna Life and Affiliated Companies William Ross McCain (1878-1972), the president of Aetna (Fire) Insurance Company of Hartford Jesse W. Randall (b. 1884), the president of the Travelers Insurance Company Harold V. Smith (1889-1962), the president of the Home Insurance Company of New York Summary of Event The Insurance Company of North America (INA), a company with a reputation for innovation, made insurance history in 1950 by introducing its famous homeowner’s policy. It offered a complete shield of protection for 341

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the home, which was most people’s single biggest lifetime investment. In offering this new type of policy, INA was responding to changing conditions brought about by World War II and its turbulent aftermath. When the war ended in 1945, the United States was by far the richest and most powerful nation on earth. It was the only major industrialized nation to escape terrible devastation during the war. The postwar period saw the greatest economic growth the nation had ever experienced. Millions of men returned from military service eager to get married, to find jobs, to have children, and to own their own homes; this was the American Dream. The federal government had several motives for stimulating home building. For one thing, legislators wanted to reward veterans for the sacrifices they had made for their country. In addition, residential construction was an important element of continuing prosperity because it generated many different kinds of jobs. It created employment not only for carpenters and practitioners of other building trades but also for lumber workers and others whose products and services related to home construction. Once a house was finished and its new residents were ready to move in, they had a need for carpets, drapes, furniture, appliances, and all manner of other home furnishings. New housing tracts in the developing suburbs created needs for streets, sewers, streetlights, shopping centers, fire and police stations, and schools. At one time, Los Angeles County was adding the equivalent of one entire new school to its public school system every day. All these needs created jobs, and jobs created prosperity. Because so many residents of the new housing tracts were dependent on automobiles for transportation, the phenomenon of the two-car family became commonplace in the United States. This created the greatest boom in automobile manufacturing the country had ever seen. The federal government made home ownership easy for veterans through the Servicemen’s Readjustment Act (G.I. Bill) of 1944, which enabled a veteran to buy a house with no down payment and a very low interest rate on the loan made to purchase the house. Under President Franklin D. Roosevelt’s New Deal programs, the government already had made home ownership easier for nonveterans through the Federal Housing Act of 1934, which required low down payments and interest rates only slightly higher than those on GI loans. The Federal National Mortgage Association was set up in 1938 to make government-insured home loans readily salable in secondary markets; this encouraged lenders to make ample funds available for such loans at attractive interest rates. The Internal Revenue Service also encouraged home buying by allowing interest payments to be deducted from gross income before taxes were computed. 342

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For about twenty-five years, from the end of World War II until President Richard Nixon implemented his anti-inflation program in 1971, it was often cheaper to own a house than to rent one. There was also a tremendous resale market for houses, because young families were subject to many vicissitudes. Divorce, job loss, and job transfer were factors that could force a family to sell its home, while promotions and the birth of more children could motivate purchase of larger and better homes. American families were moving into new houses as fast as they could be built. The entire American landscape changed radically after World War II. Builders created enormous tracts of houses in the suburbs, where land was cheap and easy to build on. Farms, orchards, and grazing land gave way to houses. The term “bedroom community” was coined to describe this new phenomenon of areas consisting mostly of housing, with little business activity. Automobiles made it feasible for young homeowners to commute to jobs in the cities, perhaps also finding entertainment there, then come home to sleep. Major cities across the country were transformed from relatively compact entities into sprawling conglomerations of houses, shops, restaurants, offices, and parking lots. The term “urban sprawl” was coined to describe this new phenomenon. Businesses of all types competed avidly for the trillions of dollars to be earned from all this activity. The so-called “old-line” insurance companies, such as the Insurance Company of North America (INA), suddenly found themselves confronted by aggressive competitors such as State Farm Insurance Company, Farmers Insurance Company, and Sears Roebuck’s successful Allstate Insurance Company. The old-line companies historically had dealt with independent agents who worked on commission. The new competitors were called “direct writers” because they employed their own agents, who could sell only their company’s policies. The newcomers to the insurance business could sell their policies cheaper because they paid their agents lower commissions and had streamlined other aspects of insurance such as claims adjusting. Independent agents hated and feared these cut-rate competitors, contending that they were not truly representing their clients but instead favoring the companies they represented. In an attempt to remain a step ahead of the competition, the prestigious Insurance Company of North America relied on its greater underwriting expertise to offer innovative new policies, such as its famous homeowner’s policy. This type of policy made insurance history when it was introduced in September of 1950. In hindsight, the innovation was of obvious benefit to homeowners, but companies previously had concentrated on selling the various types of coverage included in it as separate policies. 343

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Breaking with tradition, INA introduced the independent insurance agents of America to a new concept, a multiline policy that would cover a homeowner against almost anything that could happen to a house or on a homeowner’s property. Because a house was the most valuable purchase the average American would ever make, homeowners wanted assurance that they would not be wiped out by some unforeseen event. A lawsuit not only could strip a homeowner of everything he or she owned but also could cause debt that would take a lifetime to repay. INA’s homeowner’s policy offered coverage against damage to the home or its contents caused by fire as well as extended coverage against such forces as lightning, hail, windstorms, explosions, riots and civil commotion, aircraft, land vehicles, and smoke. The policy also included residence theft insurance and provided for legal liability for accidents on the premises and medical care for injuries to visitors. The package policy was about 20 percent cheaper than the total value of all the separate policies that would have to be purchased to obtain the same coverage. It was an immediate success. Impact of Event INA’s homeowner’s policy had a powerful impact on the insurance industry because of the issuer’s power and prestige as the largest and oldest company of its kind in the United States. The revolutionary new concept of a multiple-risk policy, to be introduced throughout the country, created a new era in the insurance business. Many other companies were forced to follow INA’s leadership to stay competitive. State Farm, Farmers, and Allstate soon had their own policies on the market, along with old-line companies including Aetna and Travelers. Generally speaking, the old-line companies, including INA, were the innovators, while the direct writers followed their leadership but offered lower rates. Once the precedent had been established of writing so-called “multipleline” or “multiple-hazard” policies, it was inevitable that INA and its competitors would begin offering other creative insurance packages to consumers. Businesses had long protested against the complicated and expensive insurance needed for protection against all the financial hazards involved in running even a small business. Soon INA and its competitors responded to this complaint by offering comprehensive fire insurance policies as well as tremendously popular comprehensive public liability (CPL) insurance policies. CPL policies covered a business for injuries sustained by customers on the premises, for injuries or property damage caused by its employees away from the premises, and for all company-owned automobiles and trucks. A business that hired new employees, acquired new properties, or added new 344

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motor vehicles to its fleet during the policy period was automatically protected. The insurance premium would be adjusted annually on the basis of an audit. All these policies made things easier for businesspeople as well as for homeowners. The package policies were created as a result of the demands imposed by an expanding economy of unprecedented proportions, and they helped to encourage further expansion of the economy by generating the confidence people needed to invest their money in real estate and business enterprises. Homeowners no longer needed to lie awake wondering what would happen if a neighbor’s child drowned in the home’s swimming pool, the family dog attacked the mail carrier, or a visitor fell down the front stairs. A businessperson could feel free to accept the many opportunities for profit that arose in the prosperous economy without having to worry about such petty matters as whether a vacant lot could safely be rented out during December to be used for selling Christmas trees; he or she knew that insurance coverage extended to any conceivable liability hazard not specifically excluded by the business’ insurance policy. The homeowner’s policy was also welcomed by banks, savings and loan companies, and other lenders because it offered them protection for their own financial stake in the residential real estate market. Previously, if a homeowner sustained a catastrophic loss not covered by insurance, he or she might be forced to abandon the house, leaving it up to the lender to repossess it. Most homes in America at the time were being purchased on long-term mortgages. GI and Federal Housing Authority (FHA) loans typically were written to be amortized over thirty years, so mortgage holders retained significant stakes in individual homes for many years. Homeowner’s policies helped to accelerate the building boom by providing better protection for the lenders who made home ownership possible. Furthermore, by providing cheaper coverage, they lowered the homeowner’s total monthly outlays for principal, interest, taxes, and insurance (PITI), which were usually included in one payment to the mortgage lender. This made it possible for some marginal buyers to own their own homes, adding further fuel to home building and the economy in general. Other innovations in insurance included new worker’s compensation package policies that covered all types of employees under the same policy and automatically covered new employees hired during the policy period. Important in all the insurance innovations of the period was the concept that competitive forces and government intervention were forcing insurance companies to respond to consumers’ needs rather than forcing the consumers to respond to the traditionally rigid requirements of the conservative insurance companies. 345

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Insurance agents welcomed the new package policies. They were much easier to sell because they were easier to explain. Agents were relieved of the unpleasant task of apologizing to a client because an unforeseen loss was not covered by any of the single-risk policies the client held. Insurance became increasingly streamlined and modernized, starting in the 1950’s, through the leadership of such American companies as the Insurance Company of North America. Companies found that they had to offer policies and packages that were competitive with those of other companies as consumers became more educated about insurance and learned to shop around for the best price. Bibliography “Big Day in Property Insurance.” Business Week, July 10, 1948, 20-21. Discusses the dramatic impact of the McCarran Act on the insurance industry. Federal antitrust laws became applicable to insurance, creating greater competitiveness in the industry and paving the way for innovative new package coverage such as INA’s homeowner’s policy. Carr, William H. A. Perils, Named and Unnamed: The Story of the Insurance Company of North America. New York: McGraw-Hill, 1967. A comprehensive history of the Insurance Company of North America as an innovator in the insurance world, with many references to the development and acceptance of its homeowner’s policy. The best book-length history of the company, written in an informal style and containing numerous interesting anecdotes. Helpful bibliography. “INA Ties Itself into a Package.” Business Week, January 9, 1965, 52-58. Describes how INA was radically restructured to handle package policies more efficiently. Covers such matters as agency relations, underwriting, setting of risk standards, and claims adjusting. Explains how expanding markets forced radical changes in the traditionally conservative insurance industry. James, Marquis. Biography of a Business, 1792-1942: Insurance Company of North America. Indianapolis, Ind.: Bobbs-Merrill, 1942. A corporate history that received critical praise for its scholarship and congenial style. “160 Years Young.” Newsweek, April 13, 1953, 78-82. A brief history of, and tribute to, the Insurance Company of North America, emphasizing some of the personalities influential in its development and describing the new competitive conditions in the insurance industry that were a striking part of the booming postwar American economy. “Packaged Policies Catch On.” Business Week, September 30, 1950, 100102. Written shortly after the Insurance Company of North America 346

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announced the introduction of its new homeowner’s policy. Discusses the reaction of businesspeople, the general public, independent insurance agents, government insurance regulators, and executives of competing insurance companies. An excellent overview. “The Underwriters: When the Supreme Court Said Insurance Was Commerce, Their World Turned Upside Down.” Fortune 42 (July, 1950): 77-81, 108-114. An excellent article describing the changes taking place in insurance as a result of recent government rulings. Contains photographs of many of the leading insurance executives of the day. Accurately forecasts the turbulent future of the insurance industry in the United States. Bill Delaney Cross-References Roosevelt Signs the G.I. Bill (1944); Congress Passes the Consumer Credit Protection Act (1968); Congress Passes the Fair Credit Reporting Act (1970); Congress Deregulates Banks and Savings and Loans (19801982); Bush Responds to the Savings and Loan Crisis (1989).

347

THE CELLER-KEFAUVER ACT AMENDS ANTITRUST LEGISLATION The Celler-Kefauver Act Amends Antitrust Legislation

Category of event: Monopolies and cartels Time: December 29, 1950 Locale: Washington, D.C. By prohibiting certain types of mergers between firms in the same industry, the Celler-Kefauver Act of 1950 led companies to form conglomerates made up of companies in unrelated industries Principal personages: Emanuel Celler (1888-1981), a New York congressman, coauthor of the act Estes Kefauver (1903-1963), a senator from Tennessee, coauthor of the act Harry S Truman (1884-1972), the U.S. president influential in passage of the act Robert H. Bork (1927), a judge and legal scholar opposed to government enforcement of the act Summary of Event The Celler-Kefauver Act of 1950 amended the Clayton Act by closing a loophole that had allowed companies to avoid antitrust suits by acquiring the assets (rather than the stock) of another company. Government enforcement of the Celler-Kefauver Act encouraged companies to seek growth through a strategy of diversification. Thus, the Celler-Kefauver Act contributed to the conglomerate movement of the 1960’s. The roots of the Celler-Kefauver Act can be traced to passage of the Clayton Antitrust Act in 1914. Section II of this law prohibited business 348

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firms from acquiring the stock of another company if the resulting merger lessened competition. The Clayton Act, however, made no mention of mergers based on the purchase of another company’s assets. During the 1920’s, American companies took advantage of this loophole to form mergers based on the acquisition of assets. The Federal Trade Commission (FTC) prosecuted the companies involved in these mergers but, in 1926, the Supreme Court ruled that the Clayton Act did not apply to acquisition of corporate assets. The Court’s interpretation made the Clayton Act an ineffective weapon against monopoly. In 1927, the FTC asked Congress to amend the Clayton Act to close the loophole, but during this prosperous decade Congress lost interest in strict enforcement of the antitrust laws. During the late 1920’s and early 1930’s, the government downplayed antitrust policy as President Herbert Hoover encouraged corporations to cooperate in a wide range of activities. President Franklin D. Roosevelt granted antitrust exemptions to those companies cooperating with the National Recovery Administration (1933-1935). NRA officials hoped that cooperation in the form of mergers and price controls would lift the nation out of the Great Depression. During the late 1930’s, Roosevelt reversed direction and attempted to silence his critics in big business by supporting a renewed antitrust campaign led by Thurman Arnold, head of the Justice Department’s Antitrust Division. Roosevelt also called for the creation of a Temporary National Economic Committee (TNEC) to study the effects of monopoly on the American economy. In its final report, in 1941, the TNEC recommended passage of legislation designed to close the asset loophole. Along with officials in the FTC and the Justice Department, the members of the TNEC formed an activist community committed to strengthening the nation’s antimonopoly legislation. Although World War II brought a temporary halt to its activity, this antitrust community pledged to resume its antimonopoly crusade once the war ended. Several factors sparked a renewed interest in antitrust enforcement in the immediate postwar period. First, a growing number of observers worried that the wartime placement of military contracts with big business had increased the overall level of economic concentration. In December, 1946, The House Small Business Committee’s Subcommittee on Monopoly (chaired by Estes Kefauver, a liberal Democrat from Tennessee) issued a report concluding that big business had benefited disproportionately from the wartime boom. The Kefauver report criticized the lackluster wartime performance of the government’s antitrust agencies and called for an amendment to the Clayton Act that would close the asset loophole. Meanwhile, the FTC tried to justify its existence by securing passage of stronger antitrust legislation. 349

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The FTC described the weak merger movement of the late 1940’s as a grave threat to competition. The FTC enjoyed the support of President Harry S Truman, a longtime advocate of antitrust enforcement. During his presidency, Truman appointed ardent antitrusters to the FTC and secured additional appropriations for the enforcement of antitrust legislation. At the conclusion of World War II, congressional antitrusters introduced a flurry of bills designed to strengthen the Clayton Antitrust Act. In 1945, Senator Joseph O’Mahoney (D-Wyoming) and Representative Estes Kefauver introduced legislation that would close the asset loophole. Their bills remained in committee, however, and for the next several years they failed in efforts to push their legislation through a Republican-controlled Congress. In 1948, the Democrats secured control of both houses of Congress, thus increasing the likelihood that a major piece of antitrust legislation would become law. During the presidential campaign, Truman had supported legislation to close the assets loophole. He interpreted his victory in the election as a mandate to go forward with strict enforcement of the antitrust law. In 1949, Truman encouraged the chairman of the House Judiciary Committee, Emanuel Celler (D-New York) to go forward with an investigation of monopolies. Celler used his committee hearings as a forum to promote his bill to amend the Clayton Act. As a newly elected senator, Estes Kefauver introduced a companion bill in the Senate. The CellerKefauver bills prohibited companies from acquiring the assets of other companies if the resulting mergers substantially lessened competition. Celler and Kefauver broke with antitrust tradition by emphasizing the alleged evils of bigness per se. In the past, the government had been concerned with the intent behind mergers and their actual effect on competition. The Supreme Court had established a “rule of reason” to govern antitrust cases. According to the Court, antitrust law applied only to unreasonable restraints upon trade. Celler and Kefauver believed that bigness automatically reduced efficiency, dampened innovation, and diminished opportunities for small business. They also argued that big business had given rise to big labor and big government. Ultimately, big business threatened the foundations of American democracy, since an all-powerful state would be required to regulate the nation’s monopolies. Celler and Kefauver resorted to Cold War rhetoric, arguing that their legislation would prevent the emergence of a totalitarian state. The business press feared that the legislation would radically restructure the American economy. Critics of the legislation, led by the United States Chamber of Commerce, believed that existing antitrust laws could prevent the development of monopolies. These opponents also criticized the FTC for exaggerating the extent of the postwar merger movement and for failing 350

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to show that mergers actually had lessened competition. Republican conservatives, however, failed to block passage of this legislation. On August 15, the House passed Celler’s bill (H.R. 2734) by a vote of 223 to 92. The Senate subsequently passed Kefauver’s bill and, on December 29, 1950, President Truman signed it into law. Impact of Event The Celler-Kefauver Act of 1950 sent a message to the business community that the federal government would closely examine the effects of any mergers between companies in the same industry. The act also gave the nation’s antitrust agencies a powerful new weapon in their campaign against monopoly. The act did not apply, however, to mergers between companies in unrelated industries. Consequently, numerous articles appeared in the business press encouraging companies to seek growth through diversification. Thus, the Celler-Kefauver Act facilitated the conglomerate merger wave of the 1950’s and 1960’s. Despite its active role in the passage of the Celler-Kefauver Act, the Truman Administration failed to enforce the law, in large part because the government reduced its antitrust activity in order to secure the cooperation of business during the Korean War. A budget-conscious Congress also reduced funding for the antitrust agencies. Corporate executives nevertheless remained cautious about acquiring competitors, and the number of mergers dropped off in the early 1950’s. Under the administration of President Dwight D. Eisenhower (19531961), the Justice Department and the FTC responded to renewed merger activity by acting more aggressively in their prosecution of antitrust cases. In 1955, the attorney general’s National Committee to Study the Antitrust Laws issued a report calling for stricter enforcement of antitrust legislation. The report also outlined the government’s interpretation of the CellerKefauver Act. According to the committee, the government need not prove that a company had intended to lessen competition by acquiring a rival; instead, the government could simply use market share as a measure of competition in an industry. The committee’s report did not address the question of conglomerate mergers. The FTC and the Justice Department followed the guidelines set forth by the attorney general’s committee. During the Eisenhower Administration, the two agencies prosecuted more than fifty cases involving alleged violations of the Celler-Kefauver Act. In one important case, brought against the Pillsbury Company, the FTC ruled that the Celler-Kefauver Act allowed the agency to prohibit mergers that lessened competition in regional or local, as opposed to national, markets. The government also 351

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brought cases against a number of the nation’s largest companies, including Bethlehem Steel, Lever Brothers, Crown Zellerbach, Minute Maid, and Anheuser-Busch. Nearly all of these cases involved mergers within the same industry. President John F. Kennedy’s attorney general continued to charge many companies with violations of the Celler-Kefauver Act. The U.S. Supreme Court approved of the government’s strict enforcement of the law. In the landmark Brown Shoe case (1962), the Court ruled that the government could halt a merger if there was a chance that it might lessen competition in any region of the country. During the 1960’s, the Court continued to consider mergers a threat to competition and, between 1962 and 1970, the nation’s highest court decided in favor of the government in all but one of the merger cases. The hostile environment led companies to avoid mergers within the same industry. Corporate executives began to pursue a strategy of diversification, forming mergers with companies in unrelated fields. Government enforcement of the Celler-Kefauver Act thus indirectly facilitated the massive conglomerate movement of the 1960’s. In 1969, President Richard Nixon’s attorney general brought antitrust suits against several conglomerates. These companies eventually settled out of court, but the suits brought against them led businesspeople to fear prosecution, and the merger movement finally slowed. In the early 1970’s, the Supreme Court under Chief Justice Warren Burger began deciding against the government in antitrust cases. During this same period, economists and legal scholars also attacked the long-held assumption that mergers necessarily resulted in lessened competition. Led by Robert H. Bork, these scholars argued that mergers often increased efficiency and lowered costs. These critics of the Celler-Kefauver Act preferred to rely upon the market to police mergers. This intellectual climate of opinion influenced policymakers, and the government stopped enforcing the Celler-Kefauver Act. With the threat of government prosecution diminished, the United States witnessed yet another merger movement in the late 1970’s and the 1980’s. Bibliography Bork, Robert H. The Antitrust Paradox: A Policy at War with Itself. New York: Basic Books, 1978. A critical study of the American antitrust tradition. In chapter 9, “The Crash of Merger Policy: The Brown Shoe Decision,” Bork discusses how the Supreme Court’s interpretation of the Celler-Kefauver Act has deviated from the original intent of Congress. Assumes some knowledge of antitrust law. 352

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Celler, Emanuel. You Never Leave Brooklyn: The Autobiography of Emanuel Celler. New York: J. Day, 1953. Provides insight into the personal and philosophical motivations behind Celler’s crusade against big business. Most of the work is devoted to Celler’s concern with immigration and other issues. Fligstein, Neil. The Transformation of Corporation Control. Cambridge, Mass.: Harvard University Press, 1990. Shows how antitrust policy has influenced corporate strategy by shifting the emphasis away from control of market share to control of companies in unrelated fields. Chapter 5, “The Emergence of the Celler-Kefauver Act, 1938-1950,” explores the legislative history of the act in depth. Chapter 6, “The Impact of the Celler-Kefauver Act, 1948-1980,” analyzes the implementation of the act and its effect on merger activity. Fontenay, Charles L. Estes Kefauver: A Biography. Knoxville: University of Tennessee Press, 1980. A balanced account of the career of one of the nation’s leading politicians during this period. In part 1, the author discusses Kefauver’s relations with Emanuel Celler and other key figures in the antitrust community. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Kovaleff, Theodore Philip. Business and Government During the Eisenhower Administration: A Study of the Antitrust Policy of the Antitrust Division of the Justice Department. Athens: Ohio University Press, 1980. A sympathetic account of the government’s antitrust policy under President Dwight D. Eisenhower. The author believes that Eisenhower viewed an aggressive antitrust campaign as an alternative to direct government regulation of business. Peritz, Rudolph J., Jr. Competition Policy in America, 1888-1992: History, Rhetoric, Law. New York: Oxford University Press, 1996. History of federal government policies relating to antitrust issues. Includes a substantial bibliography and index. Jonathan Bean Cross-References Champion v. Ames Upholds Federal Powers to Regulate Commerce (1903); The Supreme Court Decides to Break Up Standard Oil (1911); The Federal Trade Commission Is Organized (1914); Congress Passes the Clayton Antitrust Act (1914); Carter Signs the Airline Deregulation Act (1978); Congress Deregulates Banks and Savings and Loans (1980-82); AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement (1982).

353

CONGRESS CREATES THE SMALL BUSINESS ADMINISTRATION Congress Creates the Small Business Administration

Category of event: Government and business Time: July 30, 1953 Locale: Washington, D.C. By ending the Reconstruction Finance Corporation and establishing the Small Business Administration, the federal government tried to ensure that all businesses, not just the well connected, could receive help Principal personages: Wright Patman (1893-1976), a congressman from Texas, 1929-1974 William Fulbright (1905-1995), a senator from Arkansas, 1945-1974 Jesse Jones (1874-1956), a wealthy Texas businessman appointed by Franklin D. Roosevelt in 1933 to head the Reconstruction Finance Corporation Summary of Event The Reconstruction Finance Corporation (RFC), established by Congress in January of 1932, was an anti-Depression measure implemented, but little used, during Herbert Hoover’s administration. Its original mission was to provide loans to businesses, financial institutions, and railroads, but these powers were later broadened to encompass agriculture and local and state governmental works. After Franklin D. Roosevelt assumed the presidency in 1933, he installed Jesse Jones, a little-educated, successful, and well-connected businessperson, as the agency’s chairperson. In his tenure at the RFC, Jones was involved in the creation of other federal agencies such as the Federal 354

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National Mortgage Association, the Export-Import Bank, the Federal Housing Administration, and the Federal Home Loan Bank Board. Jones would later be appointed secretary of commerce. The RFC was widely respected in the 1930’s for its role in aiding businesses and financial institutions. Its influence increased further during World War II, with new subsidiaries and global activities making a substantial contribution to the war’s conclusion. The postwar period saw reversal of many of the agency’s achievements. The Employment Act of 1946 had as its goals the attainment of full employment, promotion of production, and maintenance of purchasing power. The act acknowledged uncomfortable uncertainties as to what would happen after demobilization. It was thought that after the war, during which the unemployment rate had fallen almost to 1 percent, the rate might spring back to the 9.9 percent of 1941 or even to the 14.6 percent registered in 1940. Pent-up demand caused by wartime rationing and shifts from consumer to military goods was unleashed after 1945. The main economic problem turned out to be inflation, with a prescription of fiscal restraint. Loans made by the RFC nevertheless rose in the period from 1947 to 1950, from $393 million to $500 million, in the face of Congress’ desire to curb lending. Many loans were made to less-than-vital businesses. Senator William Fulbright, chairman of a subcommittee of the Senate Committee on Banking and Currency, started a probe in 1950 that was the start of the slide of the RFC toward oblivion. A litany of testimony about questionable lending decisions convinced the panel that those with “influence” were more likely to get to the government money trough. Fulbright said the “fixers” were in control, while President Harry S Truman repeatedly said that nothing was amiss. The Republicans used this scandal as a campaign issue in 1952, promising reform and cleanup in Washington. With Dwight D. Eisenhower’s victory, the Reconstruction Finance Corporation’s demise was imminent. In May, 1953, the House Committee on Banking and Currency began its hearings on the establishment of the Small Business Administration. The counterpart committee in the Senate commenced its hearings to dismantle the RFC. The Republicans thought that to be certain of support to kill the RFC, they had to offer something in return. The House Small Business Act of 1953 was their vehicle. Its purpose was “to preserve small business institutions and free, competitive enterprise.” A new agency, the Small Business Administration (SBA), was to develop a definition of what a small business was, take a census of small businesses’ production facilities and decide upon their best utilization, provide technical and general management assistance, develop a procurement program, and develop a lending program. 355

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There was little opposition to the founding of the SBA. The American Bankers Association, the banking industry’s trade association, was one of few groups to go on record opposing the SBA. Its premise was that the government should not be involved in business lending of any kind, whether made directly or by a financial institution with a government guarantee. The association did support the dismemberment of the RFC. The Department of Commerce, though not completely disagreeing with the idea of having an independent small business agency, thought that for economy’s sake the proposed activities could be integrated into its own already existing structure. That viewpoint received little sympathy, given the department’s own checkered background and the mixed results of entities that had preceded the SBA. The Smaller War Plants Corporation (SWPC), established in July, 1942, was the first governmental effort to assist small businesses. It provided loans, both directly and in conjunction with private lenders, and assisted in government procurement, obtaining prime contracts or subcontracts for war materials. About 110,000 prime contracts or subcontracts worth about $6 billion were won by small businesses from 1942 to 1945 through the aid of the SWPC. Approximately 5,800 loans totaling more than $500 million were received by small businesses, either through direct lending or with private participation. Production pools involving 2,000 firms and 140,000 workers received $600 million in contracts through the SWPC’s efforts. The SWPC was fairly accomplished in meeting its mission, but it was a temporary agency and was disbanded at the end of the war. The Reconstruction Finance Corporation took over its lending and government procurement functions as well as the authority to sell surplus property. The Department of Commerce and its Office of Small Business assumed all other SWPC functions, including educational efforts. In 1951, the Small Defense Plants Administration (SDPA) was founded to deal with the urgencies of the war in Korea. It was given similar missions and powers as the earlier SWPC except for lending, which remained with the RFC. Most of its activity was centered in government procurement, assisting firms in receiving somewhat more than $50 million in work. The SDPA was of limited benefit to small businesses because its role was limited to defense work rather than the whole spectrum of business activity. Congress saw that there was merit in assisting small business, given the success of the SWPC and, to a lesser extent, the SDPA and the early RFC. The RFC, rife with corruption, was headed for extinction. The Department of Commerce did little with its education mandate and, it was widely believed, favored the interests of large corporations over those of independent businesspeople. Congressman Wright Patman thought that giving 356

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the new SBA, with its millions of dollars in funding, to the Department of Commerce was like “sending a rabbit for a head of lettuce.” The National Federation of Independent Business was also opposed to putting the SBA under the Department of Commerce because of that department’s perceived lack of sympathy for small business. There was thus little support for a new agency within the Department of Commerce. At about the same time, the administration decided to disband the RFC. Originally, this had not been the intent of the House and Senate, since the RFC’s authority would have expired on June 30, 1954. A budget deficit was projected for fiscal year 1954, however, and elimination of the RFC, it was thought, would contribute greatly in the reduction of the budget problem. The original House version of legislation on small business did not have any reference to the RFC. The final bill approved by the Senate in July called for elimination of the RFC by June 30, 1954, and establishment of the Small Business Administration as a temporary agency with a two-year life and a revolving loan fund of $275 million. Eisenhower signed this version on July 30, 1953. Impact of Event The impact of small business upon the economy is substantial. If the common employment measure of at least five hundred employees is applied to the approximately twenty million tax returns filed with the Internal Revenue Service in 1990, less than seven thousand firms would be classified as large businesses. Small businesses provided approximately half of all jobs in the 1980’s, and a high proportion of new jobs came from that sector. Small businesses provided about one-third of the dollar value of all goods and services supplied to the federal government, and approximately 20 percent of all manufactured goods exported from the United States were provided by firms with fewer than five hundred employees. The SBA has been committed to providing assistance to firms owned by women and members of ethnic minorities. As of 1990, women owned about 30 percent of all businesses, and African Americans owned more than 3 percent of the total. The SBA has expanded its scope since its start-up in 1953. The fundamental purposes of the SBA are to protect the interests of small business, provide counseling to current or prospective business owners, and assist in government procurement to ensure that small businesses receive a fair share of government contracts and subcontracts. The agency also lends money to small businesses, state and local development companies, and victims of disasters or economic injury. It licenses, regulates, and lends money to 357

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small business investment companies. Various specific activities help to achieve these results. The SBA provides guaranteed or direct loans to firms to acquire assets or as working capital. It can make direct loans to the disabled and to nonprofit agencies employing them, to Vietnam-era and disabled veterans, and to eligible minority contractors. It also lends to exporters. Much of its financial assistance is through a guaranteed loan program, under which loans are actually made by private financial institutions but repayment is guaranteed by the SBA in case of default. Money is also loaned to victims of natural disasters, riots, or other calamitous events to replace or repair property. Direct loans with low interest rates are available to small businesses and agricultural cooperatives hurt by natural disasters. The SBA licenses, regulates, and lends money to small business investment companies. These provide venture capital and other long-term financing to small, high-potential ventures. The SBA also provides assistance in contracting. It helps make contract bonding available, guaranteeing up to 90 percent of losses under bid, performance, or payment bonds. The SBA also works with other government agencies to increase the amount of federal government work going to small businesses in general and especially to firms owned by women and disadvantaged people. As part of its business development efforts, the SBA develops educational materials for distribution. It cosponsors workshops and seminars and has developed lists of volunteer businesspeople who provide counseling. These are the Service Corps of Retired Executives (SCORE) and the Active Corps of Executives (ACE). It also sponsors the Small Business Institute (SBI), in which advanced undergraduate or graduate business students work on long-term consulting assignments with local businesspeople. Under the 8(a) program, firms owned by the socially and economically disadvantaged receive loans and federal government work. Under the 7(j) program, these firms receive individual business assistance and consulting. The SBA’s mission has a strong emphasis on women’s business ownership. The SBA develops programs to support ownership by women and acts as a liaison with nonfederal business and educational groups to develop women’s businesses. It also has initiated a mentoring program in which women who have been in business at least five years provide long-term mentoring to women with one to three years of business experience. The Women’s Business Ownership Act of 1988 directed the SBA to develop a long-term education program for female businesspeople. This resulted in the formation of the Women’s Network for Entrepreneurial Training (WNET), the first business training program specifically targeted to women. In addi358

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tion to overseeing this program, the SBA’s Office of Women’s Business Ownership (OWBO), through the national network of local SBA offices, offers prospective and established female business owners other services, including prebusiness workshops and conferences on obtaining capital, financial and technical information, and access to a national database. Conferences on exporting, government procurement, and how to successfully sell products and services to the federal government are offered to women. Long-term consulting assistance is also available. The SBA’s Office of Veterans Affairs operates as an advocate for assistance to veterans in starting up or in continuing management of existing firms. It reviews existing assistance programs for special consideration for veterans. This office also is a liaison between federal agencies, local and state governments, and other organizations to ensure utilization of all existing programs and to promote the creation of new and more effective ones. The SBA’s Office of Private-Sector Initiatives secures state and local government cooperation to use existing initiatives so as to avoid duplication. It also promotes new ways to increase private-sector involvement to provide assistance to the SBA in meeting its goals. The Small Business Innovation Research Program sponsors projects that spark technological innovation, directs federal government research to small businesses, and increases commercialization of governmental research and development efforts. Small Business Development Centers (SBDCs), usually associated with a college or university, provide individual shorter-term counseling using students, faculty, or other staff members. The SBDC system is sometimes likened to the agricultural Cooperative Extension Service which, upon its creation in 1914, disseminated information about the most modern farming methods through county offices. The Small Business Development Center Act of 1980 empowered the Office of Small Business Development Centers and established criteria for the selection of centers not only at the more traditional sites at colleges and universities but also at state and local governmental locations and private and nonprofit organizations. In general, the SBA acts as an advocate of small business at all levels of government and in the private sector. It coordinates with other agencies to increase small business participation in international trade as well as promoting domestic business development. The SBA provides its services either at no charge or at a nominal charge. Numerous regional offices around the United States help make SBA services available to everyone. Though few data are available on the SBA’s impact, its services undoubtedly have helped many businesses increase their likelihood of success. 359

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Bibliography Blackford, Mansel G., and Austin K. Kerr. Business Enterprise in American History. 2d ed. Boston: Houghton Mifflin, 1990. Provides a concise coverage of the history of the American business firm and the evolution of government-business relations, from colonial times to the present. Dwyer, Christopher. The Small Business Administration. New York: Chelsea House, 1991. A short, nontechnical overview of the SBA’s current activities. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Parris, Addison W. The Small Business Administration. New York: Frederick A. Praeger, 1968. A comprehensive history of the SBA from 1953 to 1968. A readable summary of the events that caused the demise of the Reconstruction Finance Corporation and the formation of the SBA. Does provide some detail, but a reader interested in any specific subject will require supplementary material. Includes the text of the Small Business Act of 1953 in an appendix. U.S. Congress. House. Committee on Banking and Currency. Creation of Small Business Administration. 83d Congress. Washington, D.C.: Government Printing Office, 1953. Includes transcripts of hearings that led to the creation of the SBA. U.S. Congress. Senate. Banking and Currency Committee. Study of the Reconstruction Finance Corporation Hearings. 81st Congress. Washington, D.C.: Government Printing Office, 1950. Detailed recounting of the governmental investigation leading to the dismantling of the RFC. U.S. Small Business Administration. The State of Small Business: A Report of the President Transmitted to the Congress 1987. Washington, D.C.: Government Printing Office, 1987. Yearly report on small business compiled by the SBA and released by the president. Includes both a narrative and statistics. An excellent source for data on small business. John R. Tate Cross-References The U.S. Government Creates the Department of Commerce and Labor (1903); The Supreme Court Strikes Down a Maximum Hours Law (1905); The Supreme Court Rules Against Minimum Wage Laws (1923); The National Industrial Recovery Act Is Passed (1933); The Civil Rights Act Prohibits Discrimination in Employment (1964).

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EISENHOWER BEGINS THE FOOD FOR PEACE PROGRAM Eisenhower Begins the Food for Peace Program

Category of event: International business and commerce Time: July 10, 1954 Locale: Washington, D.C. Public Law 480 allowed the U.S. Department of Agriculture to buy surplus agricultural commodities and use them for donation abroad, for barter, or for sale for native currency. Principal personages: Ezra Taft Benson (1899-1994), the secretary of agriculture during the Eisenhower Administration John Foster Dulles (1888-1959), the secretary of state for seven years during the Eisenhower Administration Don Paarlberg (1911), an assistant secretary of agriculture under Benson Clarence Francis (1888-1985), a special adviser to Eisenhower on disposal of agricultural surpluses Clarence Randall (1891-1967), a special assistant to Eisenhower on foreign economic policy William S. Hill (1886-1972), a congressman from Colorado who introduced the legislation that subsequently became Public Law 480 Summary of Event The Agricultural Trade Development and Assistance Act of 1954, commonly known as Public Law 480 or the “Food for Peace” program, provides for surplus U.S. farm commodities to be sold for foreign currencies and used as donations and barter goods. The objectives of PL 480, as stated by 361

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Congress, are to promote economic stability for American agriculture, to expand international trade in agricultural commodities, to encourage the economic development of friendly countries, and to promote the collective strength of the free world. A variety of factors led to the passage of this legislation. Food and peace have long been closely linked in the minds of Americans. Many times in the aftermath of war, food from U.S. farms has aided in the rehabilitation of ravaged areas. In One of the greatest controversies that Dwight D. addition, from a political standEisenhower faced during his first term as president point food has often been used was the question of farm subsidies. (Library of as a lever to achieve political Congress) goals and objectives. In the 1940’s and 1950’s, a domestic agricultural problem developed. Incomes from food production in the United States did not permit American farmers to live on a scale comparable to that of people in other occupations. In order to boost farm incomes, the government agreed to buy certain products that could not be sold on the open market above a specified price. Between February, 1952, and February, 1956, the stocks of the Commodity Credit Corporation (CCC, the governmental agency charged with stockpiling surplus agricultural goods) in inventory as well as pledged against outstanding loans and purchase agreements increased almost fivefold, from less than $2 billion to $9.1 billion. Most of this buildup took place during 1952 and 1953, when annual increases in the stockpiles of 70 and 100 percent were registered. This problem of surplus government stocks was exacerbated by scientific technology. Farm productivity during this same period had increased significantly as a result of better products to control weeds, plant diseases, insects, and parasites, combined with developments in plant and livestock genetics and improved farm machinery. An additional factor was important in the subsequent passage of PL 480. American farm exports had been declining during the early 1950’s. Factors in this decline included a reduction in American economic aid to Western Europe (which had been quite high under the Marshall Plan following 362

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World War II), the fact that agricultural production and protectionism were recovering in Western Europe, scarcity of the dollar in importing countries, domestic price supports that set American commodity prices above world levels, and American export controls that limited trade with the Soviet Union and its allies. As the repercussions of the decline in exports and the growth of surplus stocks rolled across the farm economy, farm spokespeople began demanding that the government act to stabilize farm income. President Dwight D. Eisenhower’s administration was faced with the task of dealing with these multiple problems. In the summer and fall of 1953, three groups began wrestling with program proposals for agricultural policy: the U.S. Department of Agriculture, the Commission on Foreign Economic Policy, and an interdepartmental committee on the surplus. In the summer of 1953, the U.S. Department of Agriculture surveyed three national farm groups—the American Farm Bureau, the Grange, and the National Farmer’s Union—regarding farm income stability and trade versus aid, among other things. Overwhelming support was shown for a “two-price” plan for agricultural commodities. Such a scheme would support a high domestic price for the percentage of a commodity normally marketed in the United States and would allow the remainder (ostensibly exported) to be sold at the world price. Thus, the mood in the country was to continue farm income support. The Commission on Foreign Economic Policy was chaired by Clarence Randall, special assistant to President Eisenhower on foreign economic policy. The seventeen-member group was composed of agribusiness representatives, prominent agricultural economists, five U.S. senators, and five U.S. congressmen. Agricultural policy was only part of the foreign economic policy reviewed by the commission. The commission issued a report on January 23, 1954, that included a five-page section on agricultural policy. The section on agriculture elicited written dissents from eight of the seventeen members. The report argued that “a dynamic foreign economic policy as it relates to agriculture cannot be built out of a maze of restrictive devices such as inflexible price-support programs which result in fixed prices, open or concealed export subsidies, . . . and state trading.” It recommended the complete “elimination of such devices as a part of, or supplement to, our own agricultural policy.” This obviously went against the wishes of American farmers. The Department of Agriculture was effective in nullifying the report’s agricultural recommendations by insisting that any inconsistencies between the report and President Eisenhower’s January state of the union message be resolved in favor of the latter, in which Eisenhower had supported price supports on farm commodities. 363

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Meanwhile, the interdepartmental committee on the surplus had been working on legislation. This study group had been Secretary of Agriculture Ezra Taft Benson’s idea. He had persuaded President Eisenhower to establish it at the subcabinet level. After several meetings, on December 14, 1953, this committee had in hand the first draft of an administration surplus disposal bill. Despite President Eisenhower’s call for fast action, the committee could not agree on a final draft bill. Stumbling blocks included disputes concerning which commodities to include, who would have administrative authority, and to what extent the private sector should be involved. While the administration squabbled, the House of Representatives began considering various surplus disposal bills. As the spring of 1954 wore on, some sixty bills were introduced into Congress. This flurry of activity spurred the interdepartmental committee to compromise. A compromise draft was introduced by Representative William S. Hill of Colorado. It was discussed by the House Agriculture Committee on June 3, reported out, debated for two days by the House as a Committee of the Whole, and passed on June 16. Following rapid Senate action, the conference committee made some adjustments. The bill was agreed to by both houses, and Eisenhower signed it into law on July 10. Impact of Event As passed, Public Law 480 had three titles. Title I authorized sales of surplus agricultural commodities for foreign currency to “friendly” nations, identified as any countries other than the Soviet Union and those under the influence of the world Communist movement. Commodities were to move through private channels to the extent possible. Foreign currencies acquired in trade were to be used for market development, stockpile purchases, military procurement, debt payments, educational exchanges, new loans, and aid to friendly countries not part of the trades. Title II provided for grants of surplus agricultural commodities to friendly nations to meet emergency situations. Title III authorized the donation of surplus food for domestic distribution and for distribution to needy persons overseas through nonprofit relief agencies. In addition, Title III allowed for the barter of surplus agricultural commodities for strategic and other materials produced abroad. As written, the legislation did not assign administrative responsibility. Thus, President Eisenhower still had to decide which agency or agencies would administer the various titles. After considerable bureaucratic wrangling, Eisenhower issued Executive Order 10560 on September 9, 1954. This order gave the Department of Agriculture Title I authority, the Foreign 364

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Operations Administration (FOA) authority for Title II, and the Department of State the function of negotiating and entering into agreements. The budget office received allocation authority for foreign currencies, and the Treasury Department was to regulate the purchase, custody, deposit, transfer, and sale of currencies. The Office of Defense Mobilization received authority for stockpile purchases, the Department of Defense the military procurement authority, and other various agencies authority for other foreign currency uses. The executive order and accompanying documents also formalized the position of the interdepartmental committee that had been working for nearly a year. Known now as the Interagency Committee on Agricultural Surplus Disposal (ICASD), it was to continue to formulate policy under the chairmanship of Clarence Francis. Francis was brought into this position from the chairmanship of General Foods. Actual direction of the surplus disposal operation was to be handled by an Interagency Staff Committee on Agricultural Surplus Disposal (ISC), composed of one representative from each agency in the ICASD. William Lodwick, a Foreign Agriculture Service (FAS) official, was appointed as both administrator of FAS and chairman of the ISC. During the first two years of operation, PL 480 was broadened to include feed grains and to authorize the use of federal funds to pay the costs of ocean transportation and consumer packaging. During late 1958, the Department of Agriculture developed a message that the president sent to Congress on January 29, 1959. As part of this communication, Secretary Benson inserted a “Food for Peace” section in which Eisenhower announced that he was setting steps in motion to explore, with other surplusproducing nations, means of utilizing agricultural surpluses in the interest of reinforcing peace and the well-being of friendly peoples throughout the world. Title IV of PL 480 was enacted on September 21, 1959. It provides for long-term supply of U.S. agricultural commodities and sales on a credit basis to assist in the development of the economies of friendly nations. The program is of particular help to countries that “graduate” from Title I foreign currency purchasing to dollar purchasing. By early 1960, the original PL 480 program had been modified and extended several times. The Eisenhower Administration wanted to heighten public awareness of accomplishments under the program. On April 13, 1960, Eisenhower designated Don Paarlberg as the Food for Peace coordinator. Previously, Paarlberg had been an assistant secretary of agriculture and had worked with the PL 480 program as a member of the White House staff. 365

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The first, and least controversial, consequence of PL 480 has been the effect on food consumption in recipient countries. The diets of many thousands of people have been improved as a result of this program. There is some concern that the program has not facilitated economic development to the extent hoped for. The effect around which there exists the most controversy and the most confusion regards the impact of PL 480 on producers and production in the recipient countries. One view holds that the surplus disposal operations of the United States have generally hurt producers in the recipient countries and, more important, have acted to remove the incentive to increase total production in those countries. In this view, the program has acted to perpetuate food shortages. An opposing view holds that PL 480 shipments have been administered in such a way as not to hurt the producers involved; through the beneficial effects on capital formation, they have acted to increase agricultural production above what it could have been without the program. Two titles were added to the program, which became known as “Food for Progress.” Title V is the “Farmer to Farmer Program.” It provides for a minimum of 0.2 percent of total PL 480 funds to assist farmers and agribusiness operations in developing countries by transferring knowledge of farming methods from U.S. farmers, agriculturalists, land-grant universities, private agribusinesses, and nonprofit farm organizations to farms and agribusinesses in developing and middle-income countries and emerging democracies. Title VI authorizes certain activities for the reduction of debts of Latin American and Caribbean countries. In 1989, agricultural exports under PL 480 included $722 million under Title I and $469 million under Title II. This dollar volume was 3 percent of total agricultural exports. After 40 percent of the surplus commodity shipments, by value, were wheat. Bibliography Baldwin, David A. Economic Development and American Foreign Policy: 1943-62. Chicago: University of Chicago Press, 1966. Discusses a variety of approaches the United States has taken to economic development in foreign countries. Contains numerous references to PL 480 but no in-depth discussion. _____. Foreign Aid and American Foreign Policy. New York: Frederick A. Praeger, 1966. This text is a documentary analysis of American foreign policy and aid. It presents the facts in a straightforward manner with little editorializing. Much of the book is dedicated to congressional hearings. One chapter is devoted to agriculture and foreign aid. Peterson, Trudy Huskamp. Agricultural Exports, Farm Income, and the 366

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Eisenhower Administration. Lincoln: University of Nebraska Press, 1979. This is an excellent source on the background and implementation of PL 480. The author painstakingly researched the subject. Well documented with notes and bibliographic material. Quite detailed. Tontz, Robert L., ed. Foreign Agricultural Trade: Selected Readings. Ames: Iowa State University Press, 1966. Has an entire section on trade programs, including Food for Peace shipments. The majority of the sections were written by well-known agricultural economists and are short and to the point. U.S. Department of Agriculture. Agricultural Statistics, 1991. Washington, D.C.: U.S. Government Printing Office, 1991. Contains statistics on exports of agricultural commodities under specified government-financed programs, including PL 480. Similar volumes are produced annually. John C. Foltz Cross-References Congress Passes the Agricultural Marketing Act (1929); The Truman Administration Launches the Marshall Plan (1947); The Agency for International Development Is Established (1961).

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THE AFL AND CIO MERGE The AF L and CIO Merge

Category of event: Labor Time: December 5, 1955 Locale: New York, New York The American Federation of Labor and the Congress of Industrial Organizations reunited to cope with major union problems and a changing business and political environment Principal personages: George Meany (1894-1980), the AFL president who aided the merger with the CIO and served as the first president of the AFL-CIO Philip Murray (1886-1952), a CIO president who contributed to the merger John L. Lewis (1880-1969), a CIO president and leader of the United Mine Workers Walter Reuther (1907-1970), a leader of the United Auto Workers and an AFL-CIO president Sidney Hillman (1887-1946), a leader of the CIO’s political arm Jimmy Hoffa (1913-1975), a Teamsters Union president whose corruption caused major labor problems Summary of Event Led by the fiery leader of the United Mine Workers Union, John L. Lewis, nearly a million members of the American Federation of Labor (AFL) were suspended by the AFL in 1935 and were expelled officially in 1938. This massive division within the ranks of organized labor, leading to formation of the rival Congress of Industrial Organizations (CIO), was destined to last for two decades. Debate continues over whether the split was inevitable. Labor leaders such as David Dubinsky, who headed the ladies’ garment workers, along with labor historians such as Philip Taft and many politicians including President Franklin D. Roosevelt, believed the 368

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separation within the ranks of organized labor to be unfortunate as well as unnecessary. Given the tumults and uncertainties that characterized the labor scene after the CIO’s ejection from its parent organization, these perspectives were shared widely throughout the nation’s business community and the general public. Personality and generational conflicts undoubtedly fueled the causes of division. Lewis allied with David Dubinsky and Philip Murray, for example, against AFL president William Green and AFL officials such as William Hutche- Samuel Gompers, one of the founders of the AFL. son, John Frey, and Matthew (Library of Congress) Woll. Questionable actions of the AFL’s executive committee in its handling of dissidents also led to divisiveness. The split in labor’s ranks sprang from profound differences in attitudes and philosophy and from differing visions of labor’s future. The AFL, the largest, most enduring, and most successful of American labor organizations, had won its way to prominence by adhering to the principles of its founders, most notably those of Samuel Gompers, the AFL president from 1886 until his death in 1924. Carried forward diligently by Gompers’ successor, William Green, the AFL was built around the unionization of skilled workers. It stood for craft organization and craft autonomy. Mills, factories, and plants, with few exceptions, were unionized according to the trades of their skilled workers. That is, the AFL’s affiliated unions exercised jurisdiction over members working in specific crafts. A given factory thus could have several trade unions. The internal affairs of each trade’s union were virtually invulnerable to interference from AFL officials. The CIO’s leaders, on the other hand, were committed to industrial unionism, or the organization of all workers in a given plant or industry, irrespective of skills, into one comprehensive union. The rationale for this approach grew from awareness of dramatic changes in American society and in the workplace that had manifested themselves by the mid-1930’s. Lewis and other CIO leaders lamented the fact that, for the most part, 369

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semiskilled and unskilled workers lay beyond either the interest or the respect of most AFL leaders. These workers constituted large and growing parts of the workforce in mass-production industries. After furious battles against major industries during the last half of the 1930’s, reflected in the media almost daily, the CIO’s achievements were registered in its membership. By 1938, the CIO had more than 4 million members, while the AFL had 3.4 million. The CIO had grown by successfully targeting workers in mass-production industries and by winning cost-of-living increases, guaranteed annual wages, job security, and unemployment payments, as well as welfare and benefit plans. The AFL grew by adopting many CIO attitudes and objectives and by responding positively to CIO competition. By the end of the 1940’s, however, each organization had long been suffering the penalties of division, including erosive losses from duplication of effort. In addition, the national disposition toward unions had grown less tolerant, partly as a result of crippling strikes between 1945 and 1948. The political climate had therefore become less friendly. Legislative and judicial victories, moreover, had begun diminishing after the late 1930’s. An unmistakable anti-union trend was evident in the U.S. Supreme Court’s 1939 decision pronouncing sit-down strikes illegal in the Fanstock Steel case and subsequent federal court decisions upholding employers by fining union leaders for violations of the Sherman Antitrust Act. Although the LaborManagement Relations Act of 1947 (the Taft-Hartley Act) proved not to be the slave labor bill that union leaders feared it would be, it still invoked authority to curb the seemingly engorged power of union leaders and to shift the legal balance toward employers. Public confidence in and respect for union leadership were shaken further by exposures of Communist influences in several unions and by federal revelations of union racketeering and corruption, most notoriously in the Teamsters Union. These factors registered as declining union membership and quickened the drive toward reunification of the AFL and the CIO. President Roosevelt had urged a reunification as early as 1934. The deaths in 1952 of Philip Murray, who had succeeded John L. Lewis as head of the CIO, and of AFL president William Green brought new leadership to both organizations. The brilliantly successful organizer of the auto workers, Walter Reuther, took command of the CIO, while the steady, forceful George Meany became president of the AFL. With the initiative for negotiations in their hands, a stalled unity committee was reactivated. The range of divisive issues was soon narrowed. Reuther, no longer willing to have labor identified with Communist influences, previously had purged Communists from his own unions. He insisted that they be expelled 370

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from the AFL. Despite the AFL’s traditional sanctification of craft autonomy, Meany undertook a cleansing of the AFL, even though by implication it meant the beginning of centralized control within the organization. Similarly, both organizations, having confirmed by National Labor Relations Board (NLRB) statistics that their mutual membership raids and jurisdictional battles were costly and ineffective, consented to abandon them. Sixty-five AFL and twenty-nine CIO unions pledged in June, 1954, to abandon raids. With other practical and emotional complaints eased by the unity committee, a formal agreement to merge was consummated in February, 1955. The agreement was ratified on December 5 of that year. Reunification signalled agreement within the AFL-CIO to recognize both craft and industrial unionism. All unions previously holding charters from either the AFL or the CIO were eligible to join the AFL-CIO. George Meany and Walter Reuther respectively assumed the presidency and vicepresidency of the union, and posts on the executive council were divided according to the relative sizes of the former federations’ memberships. Assets were pooled. The AFL-CIO at its founding was the free world’s largest labor organization, encompassing sixteen million workers. Impact of Event In the decades following the 1955 merger, the AFL-CIO bargained with rapidly changing and unprecedentedly powerful corporations and managements. An acceleration of the corporate drive toward automation, management’s steady upgrading of skills required for employment, corporate mergers, and the rise of conglomerates and of multinationals with teammanaged technostructures all confronted the AFL-CIO with new managerial attitudes and strategies. At the same time, manufacturing industries, the traditional source of union strength, declined in importance. Union membership soon showed both a numerical decline and a decline as a proportion of the workforce. Although less susceptible to measurement, the effects of a generational change among labor leaders were important to the evolving fortunes of the AFL-CIO. The combative and colorful union leaders of the early years were replaced by less charismatic officials. Teamsters leader Jimmy Hoffa certainly contributed color to the labor arena, but his actions led the AFL-CIO to expel the Teamsters in 1957. One concomitant of the generational transition was a loss of union morale. As some labor experts noted, this was attributable to AFL-CIO unions concentrating too heavily on job security rather than on job creation, as well as to what Walter Reuther decried as the AFL-CIO’s complacency and lack of drive and vision. The tactics of conglomerates often involved the closing of unprofitable 371

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plants, the pursuit of mergers that blurred workers’ rights, and the capricious handling of union welfare, benefit, and pension funds. The AFL-CIO initiated coordinated bargaining in response. By the 1970’s, the federation had formed eighty coordinated bargaining committees charged with negotiating for workers employed by conglomerates. There were other manifestations of pressure against AFL-CIO unions by many of the country’s major corporations. Labor historians have pointed to General Electric’s (GE) employee relations policies of the late 1960’s and early 1970’s as examples of managerial strategies designed to preclude further union gains and erode existing positions. These policies were named for a vice-president of GE’s affiliated companies, Lemuel Boulware, who was responsible for reviewing labor relations. “Boulwareism” focused on persistent advertising and merchandising tactics to undermine unions and resulted in one-time, “take-it-or-leave-it” GE offers at the bargaining table. The consequence was a series of battles, some conducted under provisions of the Taft-Hartley Act before the National Labor Relations Board, and some in the courts. The highlight of the battles was a 102-day strike against the nation’s fourth largest corporation, involving 147,000 workers from thirteen unions. By spending nearly two million dollars to counter Boulware’s intensive public relations campaigns, the AFL-CIO cut so markedly into GE’s earnings that the company chose to give in to most union demands. Boulwareism was one manifestation of what some observers regarded as a 1960’s crisis in industrial relations, characterized by management’s hardened attitudes. Many large corporations reputedly believed that their attempts to achieve better employee relations, and thereby to improve worker efficiency, had failed. Nothing remained, therefore, except to destroy gains made by unions since the mid-1930’s and to regain at the bargaining table the same measure of managerial authority that management had won politically with passage of the Taft-Hartley Act and the Landrum-Griffin Act. Some observers attributed the crisis in labor relations less to labormanagement conflict than to labor-management collusion. Daniel Bell argued that the age of genuine collective bargaining as an instrument of economic and social justice was ending. Economist and public servant John Kenneth Galbraith interpreted collective bargaining as a joint exercise of “countervailing power,” by labor and management. Bell and others saw it as their jointly administered manipulation of inflation at the general public’s expense. Evidence for this thesis was drawn, for example, from events occurring in the steel industry, among others. Leaders of unions and management agreed to publicize phony threats of strikes or to call brief token 372

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strikes to raise wages and benefits for the unions; the increased costs were used to justify higher prices for products. The maneuvering, Bell and others said, contributed to persistent inflation. Other experts explained the crisis of labor-management relations differently. Crisis was explicable as a transition stage. Union-management collusion, resistance to technological change, complacency, low morale, inflationary pressures, political and governmental interference in the affairs of capital and labor, and the runaway legalism attending passage of major labor-management legislation (including the Wagner Act, the Taft-Hartley Act, and the Landrum-Griffin Act) were nothing new when viewed in historical perspective. The genuine crises of major strikes and national disruptions lay well behind. Strike activity was low, and the industrial scene increasingly could be characterized by its placidity. Government officials closely monitored the affairs of the AFL-CIO and independent unions, as well as those of corporations. Collective bargaining, in some respects, moved from the unilateral and bilateral settings prevailing from the mid1930’s through the early 1960’s to a trilateral and more complex phase, with government as a player in the game. This new phase of industrial relations involved careful consideration of the effects of an increasingly internationalized economy, of foreign competition, and of the public welfare. In 1990, the AFL-CIO reported a membership of 14.1 million. Its representation of the total workforce had declined to 19 percent. Crippling national strikes lay decades behind, and work stoppages resulted in a loss of only .02 percent of potential working time. The AFL-CIO and constituent unions had grown into an era of conciliation. Bibliography Brooks, Thomas R. Toil and Trouble: A History of American Labor. 2d ed. New York: Delacorte Press, 1971. Colorful and interesting reading. An instructive prolabor account. Chapters 12 through 25 concern the era from the 1930’s to 1970. No notes or bibliography. Galbraith, John Kenneth. The New Industrial State. Boston: Houghton Mifflin, 1967. Eloquently describes changes in American economic life that furnished the context for the AFL-CIO merger and its aftermath. Few notes. Good index. Goldberg, Arthur J. AFL-CIO, Labor United. New York: McGraw-Hill, 1956. Interesting contemporary assessment of the merger. The author is a former CIO counsel, later a U.S. Supreme Court justice. Jacoby, Daniel Laboring for Freedom: A New Look at the History of Labor in America. Armonk, N.Y.: M. E. Sharpe, 1998. Kerr, Clark. Labor and Management in Industrial Society. Garden City, 373

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N.Y.: Anchor Books, 1964. Expert, balanced, and informative. Notes and select bibliography. A useful and reflective work. Preis, Art. Labor’s Giant Step: Twenty Years of the CIO. New York: Pathfinder Press, 1972. The author’s provocative view of “American class struggle” as seen through the CIO. Chapters 36-39 deal with the merger. Brief notes on sources. Taft, Philip. The A.F. of L. from the Death of Gompers to the Merger. New York: Harper & Brothers, 1959. Standard and authoritative. Clear but colorless scholarship. Valuable index. Clifton K. Yearley Cross-References The Wagner Act Promotes Union Organization (1935); The CIO Begins Unionizing Unskilled Workers (1935); Roosevelt Signs the Fair Labor Standards Act (1938); The Taft-Hartley Act Passes over Truman’s Veto (1947); The Landrum-Griffin Act Targets Union Corruption (1959); Firms Begin Replacing Skilled Laborers with Automatic Tools (1960’s).

374

CONGRESS SETS STANDARDS FOR CHEMICAL ADDITIVES IN FOOD Congress Sets Standards for Chemical Additives in Food

Category of event: Consumer affairs Time: 1958 Locale: Washington, D.C. Following extensive debate about the long-term impact of food additives on public health, the Delaney Amendment to the Food, Drug, and Cosmetic Act required safety clearance for food additives Principal personages: George P. Larrick (1901-1968), a commissioner of the Food and Drug Administration James J. Delaney (1901-1987), a congressman from New York Anton Julius Carson, a faculty member at the University of Chicago Summary of Event The use of chemical additives in food products as flavoring, as preservatives, or as part of packaging grew rapidly during the 1940’s. The longterm impact of these chemicals on public health, however, remained largely unknown. This period also witnessed a substantial increase in the agricultural use of commercial pesticides such as DDT; again, it was unclear whether the pesticides used in production of raw agricultural goods caused any harm. Given the enormous public health implications of these issues, the U.S. House of Representatives formed a select committee to investigate the use of chemicals in foods in June, 1950. Until March, 1952, this committee (also known as the Delaney Committee, headed by James J. 375

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Delaney, representative from New York) held extensive hearings on the impact of chemical additives and pesticides in products intended for human consumption. Findings from these hearings were published later in four volumes focused on fertilizers, cosmetics, food, and fluoridation. The volume devoted to food recommended that chemicals intended to be used with foods should be tested carefully before such use to ensure safety. Although this recommendation was not acted upon by Congress immediately, it provided a basis for the Food Additives Amendment of 1958. Chemical food additives can perform a wide variety of functions. Depending on the specific food product considered, additives serve to increase the acidity or alkalinity levels, preserve or age, increase or decrease water retention characteristics, enhance color or flavor appeal, and prevent spattering of cooking fats. Preservatives have been used widely to avoid or minimize the growth of microbes in foods over time. Antimycotic agents such as acetic acid and calcium propionate are employed to fight the growth of mold and other bacteria in bread; similarly, benzoic acid inhibits bacterial growth in pickles and fruit juices. Sulfur dioxide is a popular preservative for dried fruits. Antioxidants are often used in lard, crackers, and soup bases. Another class of additives, called sequestrants, is used to retain the color, flavor, or texture of many products. Emulsifiers (such as lecithin, monoglycerides, diglycerides, and dioctyl sodium sulfosucinate) are added to food products to improve their texture or other physical characteristics: for example, enhancing the whipping attribute in frozen desserts or facilitating the dissolution of hot chocolate in cold milk. Finally, other chemicals known as stabilizers, thickeners, buffers, and neutralizers are added to food products for a variety of purposes. The Food, Drug, and Cosmetic Act, enacted in 1938, prohibited the presence of harmful or poisonous substances in food products. This provision was largely ineffective in practice because it did not require premarket clearance of food additives; it mandated premarket clearance only for new drugs and coal tar dyes. The Food and Drug Administration (FDA) had to bear the burden of proof to show that a given chemical food additive was harmful after it had been introduced in a product. Establishing such proof was difficult and time-consuming. A major flaw in the regulatory framework during the 1950’s was that as long as such proof was not established, even suspect food additives could be used legally in products available to the public. The Delaney Amendment of 1958 corrected this flaw by mandating premarket clearance of chemical additives that were not generally recognized as safe (GRAS). That is, if qualified scientists and experts believed that a given substance could be added safely to food products, the substance 376

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could be classified under the GRAS category and thereby exempted from the premarket clearance requirement. The inclusion of a new food additive under GRAS could be justified on the basis of scientific data; for food additives already in use before January 1, 1958, such justification could stem from prior safe-use experience in food products. The Delaney Amendment mandated the submission to the FDA of certain details concerning any new food additive—the formula depicting its chemical composition, a description of proposed usage characteristics, the procedure used for its manufacture, and the manner in which its presence in food products could be detected accurately at the expected levels of use. In addition, the prospective user of the new additive was required to furnish evidence that the additive accomplished the intended effects on food and that the degree of additive usage was not higher than necessary to achieve these effects. More important, the user had to provide data documenting the safety of the proposed food additive. This evidence took the form of studies in which varying amounts of the additive were included in the intakes of at least two species of animals. Finally, even if the FDA approved the usage of a newly proposed food additive, it could limit the additive’s usage by specifying tolerances. Tolerances are commonly determined through animal feeding tests. These tests of an additive may show, for example, that a 1 percent residue of the chemical has no adverse effect. A pharmacologist in charge then may arbitrarily divide by one hundred and say that .01 percent is safe for humans. Tolerances rest on the tenuous assumption that small doses of poisonous chemicals are harmless even if ingested over a long period of time; therefore, it is possible that tolerances lend acceptability to additives that are inherently dangerous to public health. During the congressional hearings on the Delaney Amendment, two issues caused significant debate. The first controversy centered on the “Delaney anticancer clause,” which declared that no food additive could be considered safe if it was found to induce cancer in humans or animals. This clause was opposed by several experts and even by the FDA, on the grounds that it was not in line with scientific judgment. For example, several individuals called into question the wisdom of banning the limited human consumption of food additives merely because they induced cancer in some animals. Others thought that it was inappropriate to focus on a specific disease (cancer) while establishing legislative standards. These objectives notwithstanding, the Delaney anticancer clause was incorporated into the 1958 amendment as signed into law. The second issue involved sustained lobbying efforts by the food and chemical industries for the inclusion of a “grandfather clause,” a provision specifically exempting all chemical additives in use at that time from the 377

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mandatory testing requirement. Delaney strongly objected to this plea because the grandfather clause would render almost 150 chemical additives automatically acceptable without any rigorous scientific evidence on their safety. Although industry representatives argued that the food additives in use qualified for exemption because of their past record of safety during prolonged use, it was unclear what constituted an acceptable definition of prolonged use for each additive. Some chemical food additives may require as long as twenty years before their cumulative health impact can be assessed. Furthermore, several chemical additives had been declared as unsafe only after they were used in food products for several years. For example, Anton Julius Carson, a medical expert from the University of Chicago, had testified before the Delaney Committee about the harmful effects of hydrofluoric acid and mineral oil, food additives that had been added routinely to beer and popcorn, respectively, for several years. Delaney also questioned the value of mandating public protection against new food additives through elaborate testing when “old” additives that were untested for safety were permitted in food products consumed by the public. The grandfather clause was not incorporated into the 1958 amendment despite sustained efforts from the food and chemical industries. These industries, however, won other notable concessions. First, through a series of legislative measures, Congress gave the industry substantial time (until December, 1965) to finish safety evaluations of specific chemicals already in use. Second, the amendment did not incorporate the FDA viewpoint that chemical food additives should not only be harmless to humans but also must possess some functional value; the motivation was to discourage the use of additives that, while not considered unsafe, did not serve any useful purpose to consumers. Both Delaney and George P. Larrick, the FDA commissioner, vehemently argued for the functional value provision. Larrick defined functional value as stemming from any characteristic of the food additive that directly benefited consumers by enhancing convenience or indirectly benefited consumers during the process of product distribution. Further, he provided several examples in which chemical additives had been added to food products only because it was profitable or convenient for the industry to do so, and not because they served any consumer interest: the use of boric acid to preserve codfish and whole eggs in an attempt to conceal poor manufacturing or storage practices; the reliance on fluorine chemicals in alcoholic beverages such as wine and beer to curb fermentation, a result better accomplished through pasteurization; the inclusion of monochloracetic acid in carbonated beverages as a substitute for proper sanitation practices; and the addition of salicylates in shrimp sauce to inhibit decomposition 378

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processes triggered by poor manufacturing or holding practices. Larrick argued in vain that the safe but unnecessary use of chemical additives should not be a prerogative of the food industry. Impact of Event The 1958 amendment played a major role in promoting long-term public health primarily because of two features. It extended the premarket clearance requirement to food additives and prohibited the addition to foods of any chemicals shown to be animal carcinogens (substances that cause cancer in animals). To appreciate the impact of the Food Additives Amendment, it is useful to study its interpretation and enforcement over the years. The anticancer clause applies to both direct and indirect food additives. The latter comprise chemicals that migrate into food from food packaging material. In addition, more than one hundred drugs used in food-producing animals are subject to the clause. Three important practical issues arise from the clause. First, although it appears to categorically prohibit the addition of carcinogenic chemicals to foods, there appears to be considerable leeway in deciding whether a substance is carcinogenic. As one example, there was an intense debate as to whether saccharin is carcinogenic. Other fairly common additives are the subject of the same question. Second, a proviso in the clause specifically exempts carcinogenic food and animal drugs added to the feed of foodproducing animals. That is, if chemical additives in animal feed do not harm the animal and do not leave any residue on the edible parts of the animal (intended for human consumption), such additives are exempt from the scope of the clause. Finally, no chemical food additive is strictly free from all carcinogens. Certain carcinogens such as lead and halogenated compounds contaminate all chemicals, including food additives, at minute levels. Moreover, subsequent to the 1958 amendment, it has become technologically feasible to analyze chemical substances at extremely low trace levels, measurable in parts per million or parts per billion. For these reasons, the FDA developed a constituent policy in March, 1982, that states that a food additive can include carcinogens as long as the degree of risk associated with the extent of the carcinogenic presence is acceptably low. This is in keeping with the spirit of the 1958 amendment, although it is a reversal of the letter of the Delaney clause. In defining what constitutes an acceptably low standard, the FDA has used an upper limit of one case of cancer following the exposure of a million people to a food additive. In the early 1980’s, several bills introduced in Congress contained language that would have revised the food safety legislation that had 379

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prevailed for several decades. These bills—S. 1938 and H.R. 4121 in 1983, S. 2512 in the 99th Congress, S. 2875 and H.R. 4739 in the 100th Congress, and S. 722 and H.R. 1725 in the 101st Congress—called for revisions of the Delaney clause to avoid the ban of a carcinogenic additive if scientific evidence suggests that the human risks involved under intended conditions of use are negligible. None of the bills passed. Bibliography Flamm, W. G. “Food-borne Carcinogens.” In Chemical Safety Regulation and Compliance, edited by Freddy Homburger and Judith K. Marquis. Basel, Switzerland: S. Karger, 1985. Discusses this class of carcinogens. Kleinfeld, Vincent A., and Alan H. Kaplan. Federal Food, Drug, and Cosmetic Act: Judicial and Adminstrative Record 1961-1964. Chicago: Commerce Clearing House, 1965. This book belongs to the Food Law Institute Series and is a useful source of information on laws related to food and drugs. It contains the text of the Food, Drug, and Cosmetic Act and its amendments as well as the details of legislative and judicial activities initiated in connection with the Federal Food, Drug, and Cosmetic Act between 1961 and 1964. Kokoski, C. J. “Regulatory Food Additive Toxicology.” In Chemical Safety Regulation and Compliance, edited by Freddy Homburger and Judith K. Marquis. Basel, Switzerland: S. Karger, 1985. Discusses testing methods for food additives. Mooney, Booth. The Hidden Assassins. Chicago: Follett, 1966. Provides an informative overview of the hearings conducted by the Delaney Committee and describes how these hearings led to the 1958 Food Additives (Delaney) Amendment. Skinner, K. “Scientific Change and the Evolution of Regulation.” In Chemical Safety Regulation and Compliance, edited by Freddy Homburger and Judith K. Marquis. Basel, Switzerland: S. Karger, 1985. Describes how advances in science have affected regulation and testing. U.S. Congress. House. Committee on Interstate and Foreign Commerce. Subcommittee on Public Health and Environment. A Brief Legislative History of the Food, Drug, and Cosmetic Act. Washington, D.C.: U.S. Government Printing Office, 1974. Presents a comprehensive account of the historical circumstances that led to the Food, Drug, and Cosmetic Act of 1938. Also discusses the circumstances surrounding the formation of the Delaney Committee and how this committee’s findings eventually led to the 1958 Food Additives Amendment. Several other amendments to the act are also discussed. Siva Balasubramanian 380

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Cross-References Congress Passes the Pure Food and Drug Act (1906); Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965); Congress Passes the Consumer Credit Protection Act (1968); The United States Bans Cyclamates from Consumer Markets (1969); The Banning of DDT Signals New Environmental Awareness (1969); Nixon Signs the Consumer Product Safety Act (1972).

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THE LANDRUM-GRIFFIN ACT TARGETS UNION CORRUPTION The Landrum-Griffin Act Targets Union Corruption

Category of event: Labor Time: September 14, 1959 Locale: Washington, D.C. By regulating union elections, requiring disclosures, establishing a bill of rights for members, and eliminating “hot cargo” clauses, the Landrum-Griffin Act attempted to reduce union corruption Principal personages: Philip M. Landrum (1907-1990), a Democratic representative from Georgia, cosponsor of the Landrum-Griffin bill Robert P. Griffin (1923), a Republican congressman from Michigan, cosponsor of the Landrum-Griffin bill John F. Kennedy (1917-1963), a Democratic senator from Massachusetts, subsequently the thirty-fifth president of the United States Sam Ervin (1896-1985), a Democratic senator from North Carolina, cosponsor of the Kennedy-Ervin bill George Meany (1894-1980), the president of the AFL-CIO John L. McClellan (1896-1977), a Democratic senator from Arkansas Graham Arthur Barden (1896-1967), a Democratic congressman from North Carolina, chairman of the House Committee on Education and Labor Barry Goldwater (1909-1998), a Republican senator from Arizona, sponsor of the administration’s reform bill Dwight D. Eisenhower (1890-1969), the thirty-fourth president of the United States Sam Rayburn (1882-1961), a Democratic congressman from Texas, Speaker of the House in the eighty-sixth Congress 382

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Summary of Event On September 14, 1959, in response to revelations of corrupt labor practices during hearings of Senator John L. McClellan’s Committee on Improper Activities in Labor-Management Affairs, President Dwight D. Eisenhower signed the Labor-Management Reporting and Disclosure Act of 1959, popularly known as the Landrum-Griffin Act. The McClellan Committee had focused much of its investigation on the Teamsters Union and its president-elect, James R. “Jimmy” Hoffa. The American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) had responded to the adverse publicity by expelling the Teamsters and other unions from its ranks. In addition, the McClellan Committee’s recommendations in favor of legislation to regulate benefit funds and to ensure union democracy received widespread public support. In 1958, Congress passed the Welfare and Pension Plans Disclosure Act to regulate benefit funds. The public anticipated further legislative action in 1959. There were several labor bills before the Senate in 1959, the most important of which were the Kennedy-Ervin bill, successor to the KennedyIves bill of 1958, and the Goldwater bill, which reflected the Eisenhower Administration’s interests. Both bills contained provisions requiring regulation of and reporting and disclosure of financial information by trusteeships, which had been misused by national unions to assume control of dissident locals. The AFL-CIO and its president, George Meany, backed the KennedyErvin bill, subsequently called the Kennedy bill. Management groups such as the National Association of Manufacturers and the Secondary Boycott Committee of the United States Chamber of Commerce objected to several provisions in the Kennedy bill that were favorable to unions. The management groups argued that Congress should place unions under antitrust laws and curb their use of secondary boycotts. In a secondary boycott, a union involved in a labor dispute with one employer brings pressure to bear on a second employer, which may be a customer of the first, to encourage the second employer to refrain from purchasing the first’s products or otherwise doing business with the first. More than one hundred conservative amendments, including more than seventy by Senator Barry Goldwater, were introduced on the floor of the Senate. The most important of the proposed amendments was Senator McClellan’s “bill of rights for union members.” In response to an impassioned speech, McClellan’s amendment passed the Senate by one vote. The Senate subsequently softened the amendment when it was realized that McClellan’s bill of rights inadvertently opened union membership to black workers. The labor movement was stunned by the antilabor amendment’s pas383

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sage, because congressional Democrats had won a substantial majority in 1958. Labor believed that Congress would inevitably support its interests. A bipartisan group proposed a compromise between conservative and labor interests that saved the Kennedy bill by including the McClellan amendment. Ultimately, to the AFL-CIO’s chagrin, the Kennedy bill, including the McClellan amendment, passed the Senate. Labor faced setbacks in the House of Representatives as well, and its intransigence with respect to the compromise bill resulted in the ultimate passage of the Landrum-Griffin bill, which was even more antagonistic to labor’s interests than was the Kennedy bill. The House Committee on Education and Labor, chaired by Representative Graham Arthur Barden, reported a revised version of the Kennedy bill in spite of intensive lobbying by the AFL-CIO. George Meany became embroiled in an argument about it with Sam Rayburn, Speaker of the House, and wrote a letter to all members of Congress stating the AFL-CIO’s opposition to the committee’s bill. Only four days after the committee voted to report its version of the bill, committee members Philip M. Landrum and Robert P. Griffin introduced their bill, which was backed by management groups and the Eisenhower Administration. The Landrum-Griffin bill, the committee’s bill, and a bill supported by the AFL-CIO all had similar anticrime provisions. The chief differences among them concerned economic issues unrelated to crime in unions. The Landrum-Griffin bill had stronger provisions with respect to organizational picketing, secondary boycotts, and “hot cargo” clauses than did the other bills. Under hot cargo clauses, an employer agrees not to handle the goods of nonunion employers. Lobbying was intense. President Eisenhower made a television appearance in support of the Landrum-Griffin bill. Management lobbyists broadcast and publicized the Armstrong Cork Company’s television play The Sound of Violence, which depicted union corruption. The labor movement was divided about reform. The Teamsters and the United Mine Workers opposed any legislation, the United Auto Workers favored strict legislation, the construction unions were ambivalent, and the AFL-CIO supported mild legislation. Despite the divisions, which weakened the labor movement’s lobbying efforts, the Senate-House Conference Committee softened some of the bill’s provisions, for example by offering special provisions to unions in the construction and garment industries. As passed, the Landrum-Griffin Act had two distinct objectives: first, to regulate unions and end corruption, and second, to tighten the proscription of secondary boycotts contained in the Taft-Hartley Act of 1947. The act’s first six titles concern corruption. Title I, the bill of rights, guarantees 384

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members’ rights to vote in union elections, to sue their unions, to run for union office, and to speak openly. It prohibits increases in dues except by secret ballot or appropriate procedures at the national level. Title II requires unions to adopt constitutions and to file annual financial reports and disclosures of officers’ assets with the secretary of labor. It also requires that unions report on qualifications for union membership, procedures for the calling of elections, and disciplinary procedures. Title III regulates trusteeships. It requires that a report be filed with the secretary of labor within thirty days of the imposition of a trusteeship. Title IV regulates the election of union officers and requires that elections be held by secret ballot or by convention not less often than once every five years. Title V imposes fiduciary standards; that is, it declares that every union officer is a trustee who is open to suit by union members in case of unethical conduct. It establishes bonding requirements for union officers and prohibits loans in excess of $2,000 by unions to their officers or employees. It also prohibits communists and individuals convicted of a crime within the last five years from holding union office. Title VI illegalizes picketing for the personal enrichment of union officers. Title VII, the most controversial portion of the act, proscribes secondary boycotts and hot cargo clauses. It proscribes organizational picketing when the employer has previously recognized another union, when the union has not petitioned the National Labor Relations Board for an election within thirty days, or when there has been a union election within the preceding year. More favorable to union interests, it permits strikers who have walked off the job for economic reasons to vote in union elections. Impact of Event The Landrum-Griffin Act was a harbinger of a long decline in the labor movement’s political and organizational power. Its economic provisions, which received much of the lobbyists’ and politicians’ (but not the public’s) attention in 1959, may have been more important than its provisions on labor racketeering. There were tangible results from the act’s anticrime rules. Fifty-four unions revised their constitutions to comply with the act, and by 1970 the Department of Labor’s Office of Labor-Management and Welfare-Pension Reports was processing thousands of complaints under the Landrum-Griffin Act each year. More than 90 percent were found to be lacking in merit or were settled voluntarily. Indictments for embezzlement and other offenses under the act proceeded at a rate of at least seventy per year from the 1960’s through the 1980’s. Furthermore, the Department of Labor supervised a number of court-ordered elections and oversaw national 385

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and international elections in which officers of the Steelworkers, Electrical Workers, and Teamsters were removed or defeated by opposition candidates. In addition, the number of trusteeships of locals fell by 60 percent from five hundred to two hundred per year, subsequent to the act’s passage. For most working people, the act’s availability of law suits against union officers in court is impractical to use for financial reasons. The costs of bringing suit are out of most workers’ reach. Furthermore, some observers have noted that the Department of Labor has been reluctant to bring suits on behalf of individuals who have been denied the right to a fair election and that this reluctance undermines the act. Ronald G. Goldstock, director of a task force on organized crime in New York State, argued that the Department of Labor should be relieved of responsibility for enforcing Landrum-Griffin and that attorneys’ fees should be more readily available to plaintiffs. Although it is difficult to measure the act’s effects on rates of crime and racketeering, Goldstock provided extensive documentation of continued criminal influences in unions thirty years after the LandrumGriffin Act was passed. Criminal laws with respect to embezzlement, racketeering, and violence in unions existed prior to Landrum-Griffin and continue to exist under state criminal codes. Few observers believe that union democracy has increased dramatically as a result of the act. There is little evidence to suggest that membership participation in internal affairs has appreciably increased. Despite its conservative impetus, some labor analysts see it as reaffirming federal policies that fundamentally support collective bargaining and labor unions. The law’s impact on existing unions may not have been as great as its impact on the establishment of new unions. For example, the law had scant effect on the Teamsters. The union merely followed the act’s election procedures and rewrote its hot cargo clause in 1961 to emphasize the individual worker’s right to refuse to handle hot cargo. The 1961 Teamster’s contract disingenuously included a section emphasizing the need for employers to deliver goods subject to secondary boycotts and waiving the union’s jurisdiction in case of a secondary boycott, although the courts rejected this ruse. It was not until the late 1980’s that the federal government took aggressive action against the Teamsters. The act’s symbolic and practical effects on the union movement’s political power and ability to organize may have been most significant. When Landrum-Griffin was passed, the American labor movement was at its historical peak of political influence and power. Even with a Democratic Senate and House, however, it could not command the votes necessary to pass the Kennedy-Ervin or Shelley bills, the crime bills it supported. Furthermore, the act’s prohibitions on aggressive organizational picketing, 386

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secondary boycotts, and hot cargo clauses may have contributed to the subsequent decline in union membership from nearly 32 percent of the nonagricultural labor force in 1959 to about 16 percent in 1990. Bibliography Chamberlain, Neil W., and James W. Kuhn. Collective Bargaining. 3d ed. New York: McGraw-Hill, 1986. An excellent introduction to the concepts and ideas behind collective bargaining. The authors argue that in the historical context of the development of labor law, both the TaftHartley Act and the Landrum-Griffin Act can be viewed to have affirmed that labor unions are essential. Goldstock, Ronald G. Corruption and Racketeering in the New York City Construction Industry: Final Report to Governor Mario M. Cuomo. New York: New York University Press, 1990. A 233-page report of interest to students of organized crime and corrupt labor practices. Published more than thirty years after Landrum-Griffin was passed, it provides detail on continuing pervasive corruption in New York City’s construction unions. Argues that Landrum-Griffin has failed and recommends specific reforms. Gould, William B. A Primer on American Labor Law. Cambridge, Mass.: MIT Press, 1986. A 260-page book of interest to lay readers. Offers an overview of U.S. labor law and describes the Landrum-Griffin Act in its legal context. Hutchinson, John. The Imperfect Union: A History of Corruption in American Trade Unions. New York: Dutton, 1970. Analyzes the history of labor racketeering and corruption in several industries. Argues that the Landrum-Griffin Act has been moderately successful. Jacoby, Daniel. Laboring for Freedom: A New Look at the History of Labor in America. Armonk, N.Y.: M. E. Sharpe, 1998. James, R. C., and E. D. James. Hoffa and the Teamsters. Princeton, N.J.: D. Van Nostrand, 1965. A 430-page classic describes two university professors’ ninety-day field study of Hoffa. Of interest to general readers. Includes discussions of practices that led to the Landrum-Griffin Act and an analysis of the Teamsters Union’s reaction. Katz, H. C., and T. A. Kochan. An Introduction to Collective Bargaining and Industrial Relations. New York: McGraw-Hill, 1992. Well-written introduction to the general subject of industrial relations by two leading scholars in the field. McAdams, Alan K. Power and Politics in Labor Legislation. New York: Columbia University Press, 1964. This 346-page book analyzes the legislative background and history of the Labor-Management Reporting 387

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and Disclosure Act of 1959. Valuable for its information about the political context in which Landrum-Griffin was passed and its step-bystep analysis of the law’s development in Congress. National Labor Relations Board. Legislative History of the Labor-Management Reporting and Disclosure Act of 1959, Volumes I and II. Washington, D.C.: U.S. Government Printing Office, 1959. A 1,926-page reference work containing documents concerning the Landrum-Griffin Act. Volume 1 includes early drafts, including drafts of related bills and conference committee reports. Volume 2 includes the congressional debate and a comparison of the Taft-Hartley Act of 1947 with amendments made by the Landrum-Griffin Act. Summer, Clyde W., et al. Union Democracy and Landrum-Griffin. New York: Association for Union Democracy, 1986. Includes a good description of the Landrum-Griffin Act. Mitchell Langbert Cross-References The Wagner Act Promotes Union Organization (1935); The Taft-Hartley Act Passes over Truman’s Veto (1947); Hoffa Negotiates a National Trucking Agreement (1964); Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965).

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FIRMS BEGIN REPLACING SKILLED LABORERS WITH AUTOMATIC TOOLS Firms Begin Replacing Skilled Laborers with AutomaticTools

Categories of event: Manufacturing and labor Time: The 1960’s Locale: The United States and other industrialized countries By adding programmable control devices to machines used in manufacturing, industry was able to retain much of the flexibility provided by skilled workers while automating production Principal personages: John Parsons (1908-1969), the designer of the Cardamatic milling system and father of numerical control Gordon Brown (1907), the director of the MIT servomechanisms laboratory William Pease, the director of the MIT numerical control project Summary of Event Numerical control (N/C) is a form of general-purpose machinery control that uses digital computers and programs in the manufacture of items formerly made using general-purpose equipment under the control of skilled operators. The development of this technology in the 1950’s provided manufacturing management in the 1960’s with the opportunity to increase control over manufacturing operations by replacing a class of skilled laborers with machines. Previously, these skilled workers had been irreplaceable. Significant social and technical factors were behind the development of N/C technology. Among these factors were a hazardous work environment in manufacturing. Between 1940 and 1945, according to one estimate, 389

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eighty-eight thousand workers were killed and more than eleven million were injured as a result of industrial accidents, eleven times the total U.S. casualties in combat during World War II. Second, labor unrest and disruption of work by strikes motivated management to find technology to replace workers. The end of World War II marked the beginning of the greatest industrial crisis in American history, industrial relations expert Neil W. Chamberlain has written. The years 1945 and 1946 saw the biggest strike wave in the history of a capitalist country. Between 1945 and 1955, there were more than forty-three thousand strikes, idling some twenty-seven million workers. A third factor in the development of N/C technology was a shortage of skilled machinists. As early as 1947, the Bureau of Labor Statistics had warned that the pool of skilled machinists was drying up. A 1952 study verified this assertion and named retirement, reduced immigration from Europe, and a shortage of apprenticeships as the causes. Fourth, the military was developing aircraft and missiles that required extremely tight tolerances and advanced machining skills to produce. Finally, management had a desire for greater control of manufacturing processes in order to achieve technical and economic objectives. In the environment outlined above, it is not surprising that labor replacement technologies were of great interest to industrialists. Wide use of automation technology in industry began with “continuous flow” processes, in which elements of a product are combined continuously. By the 1950’s, the first industrial operations to be controlled by analog computers appeared in the electrical power and petroleum refinery industries. At Texaco’s Port Arthur refinery, production went under full digital computer control in 1959. A year later, Monsanto went to digital computer control at its Louisiana ammonia plant, as did B. F. Goodrich at its vinyl plastic facility in Calvert, Kentucky. Soon, steel rolling mills, blast furnaces, and various chemical processing plants around the United States went under full computer control. Companies such as International Business Machines and Honeywell began to design computer systems specifically for manufacturing operations in the 1950’s. By 1964, there were approximately one hundred systems operational, or on order, in the petroleum refining industry alone. This technology, however, was special-purpose in nature and only effective in replacing unskilled workers performing extremely repetitive tasks. The greater challenge in replacing labor with machines was the development of a means of nonhuman control of general-purpose equipment that currently required skilled operators. The challenge of automating machine tools was how to render a general-purpose machine tool (such as a lathe or drill press) self-acting, or acting automatically according to prespecified instructions without human intervention. Adding to the challenge was the 390

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desire to retain versatility, which was required for short-run production and small batch jobs. Essentially, this was a problem of programmable automation, of temporarily transforming a universal machine into a specialpurpose machine through the use of variable programs. With programmable automation, a change in the product being manufactured required only a switch in programs rather than reliance upon machinists to retool or adjust the configuration of the machine itself. Programmable automation would not simply render automatic operation flexible; it would also give management more direct control over the machinery of production and undermine the power of machinists on the shop floor. A variety of approaches to programmable automation were considered. These included record-playback or motional control (with a machine recording the movements of a human worker and then playing them back), tracer control, plugboard controls, and numerical control (N/C). The N/C technique ultimately became the industry standard by meeting the challenge of automating general-purpose machine tools and providing management with greater control of production. With both record-playback control and N/C, the motional information required to manufacture a part was stored on a permanent medium, such as paper tape or magnetic tape. In this way, the record-playback system served to enhance or multiply a machinist’s value; this may have contributed to management’s lack of complete satisfaction with this approach. With N/C, however, the need for machinists’ skills was reduced. The motions of the machine tool required to produce a particular part were described in detail mathematically, corresponding to the blueprint specifications for the part, and were recorded as numerical information. The entire process of producing a part, including the skill of the machinist, was reduced to formal, abstract description. That description was then translated (usually by a computer) into commands to activate machine controls. Numerical control was an abstract synthesizer of skill, circumventing the need for the machinist; an N/C tool acted as an “automatic machinist.” The widely recognized father of numerical control is John Parsons. Parsons was a machinist who was in search of a means of manufacturing a particular type of wing for the Air Force. His initial designs used extensive hand computations and made use of drilling equipment that was automated, by use of commands recorded on tape, to make specified parts by drilling holes tangent to the surface of the part to be manufactured. The remaining excess material was then to be sanded down in order to bring the part into specification. In June, 1949, Parsons was awarded a contract by the Air Force to develop an “automatic contour cutting machine” that would be controlled by punched cards or tape and would be capable of making contour cuts, or 391

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cutting rounded shapes such as those found in an aircraft wing. In the pursuit of this business, Parsons subcontracted with the servomechanisms laboratory at the Massachusetts Institute of Technology (MIT) for a portion of the development. Ultimately, the MIT lab adopted and successfully developed a continuous path contour cutting approach beyond the scope of Parsons’ expertise and funding. The lab took over the development of N/C technology with funding from the Air Force that endured until 1959. Impact of Event The development of N/C technology has been referred to as the greatest innovation in manufacturing since the assembly line. In the late 1950’s and early 1960’s, expectations for numerical control were high. Industry experts predicted sales growth of 50 percent per year for N/C systems. Others referred to the inevitability of automation. Willard F. Rockwell, chairman of North American Rockwell Corporation, linked numerical control with nuclear power and space flight as the three great developments of the contemporary generation. The early expectations were too high. As late as 1973, American Machinist reported that N/C machines represented less than 1 percent of all machine tools in use and perhaps several percent of overall industry capacity. This was despite the doubling of the number of N/C machines in the previous five years and a tenfold increase in the previous ten years. The concentration of these systems was in the machine tool industry itself as well as in the aircraft and aircraft engine industries. Diffusion of the technology was slower than commonly anticipated. Part of the difficulty with the diffusion of N/C technology was its economic justification. Previous methods for justifying equipment purchases and previous methods for determining the cost of parts did not fit the new technology well. Programming the new equipment was another problem: Machinists were not programmers, and programmers were limited in number and lacked understanding of machining practices. Finally, the equipment developed initially was quite sophisticated, with control of five axes of movement, and offered more than many manufacturers required or were willing to pay for. As a consequence, many early adoptions of the technology were motivated by blind faith in the technology, fear of getting left behind, or faith in the advantages of automated machinery over labor rather than strict cost-benefit evaluations. N/C technology did provide industry with “islands of automation,” and there have been notable successes in its use. Since the development of N/C technology, advances in other areas of automation have taken place. The N/C approach has been improved by incremental advances, beginning with 392

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computerized numerical control (CNC). CNC eliminates the need for tape as a means of programming and control. A programmable control unit with its own memory is housed on the machine tool itself. Direct numerical control (DNC) was the next incremental advance. This allowed a host computer to control one or more N/C machines directly. Flexible manufacturing systems (FMS) have been developed, utilizing group technology to identify a set of items that can be made with some combination of N/C, CNC, and DNC machines within a completely automated manufacturing cell. Finally, computer integrated manufacturing links a variety of computerized automation technologies (including FMS, DNC, CNC, N/C, computer-aided design, computer-aided manufacturing, automated material handling systems, and manufacturing planning and control systems) in a common centralized manufacturing computing system with shared data access. As the “islands of automation” become integrated to greater degrees, and as organizational structures and operational systems change to reflect the changes in technology, manufacturers are beginning to experience some synergy in the automation technologies they employ. A devotion to technological solutions to manufacturing problems is part of American industrial society, and N/C technology remains an integral part of the American concept of modern manufacturing technology. It should be noted that a “people” revolution also took place in American industry. The “total quality” revolution of the 1980’s brought with it a dedication to employees and to employee involvement as the primary means of process improvement. This philosophy and approach is at odds with the wholesale replacement of labor by machines and technology. By the early 1990’s, the pendulum had swung to the side of process improvement via employee involvement. It is likely that both the technological revolution and the people revolution will come to be recognized as vital elements in the development of modern manufacturing processes. Bibliography Chase, Richard B., and Nicholas J. Aquilano. Production and Operations Management: A Life Cycle Approach. 6th ed. Homewood, Ill.: Irwin, 1992. This text is widely used in courses surveying the function of operations management. Chapter 3, “Product Design and Process Selection—Manufacturing,” is the most directly applicable to this topic. The authors focus almost exclusively on the technologies, rather than including labor reduction considerations. Productivity and competitiveness issues are discussed more directly elsewhere in the text. Gaither, Norman. Production and Operations Management. 5th ed. Fort Worth, Tex.: Dryden Press-Harcourt Brace Jovanovich, 1992. Chapter 5 393

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of this basic text deals with production technology. This chapter discusses types of automation, automated production systems, factories of the future, and decision-making issues related to automation in manufacturing and services. Greene, James H., ed. Production and Inventory Control Handbook. 2d ed. New York: McGraw-Hill, 1987. This exhaustive reference work is the authoritative publication of the American Production and Inventory Control Society. Chapter 20, “Computers in Manufacturing,” is particularly relevant to modern automation technologies. Robotics, computeraided design, computer-aided manufacturing, group technology, flexible manufacturing systems, cellular manufacturing, and information systems are discussed. Jacoby, Daniel. Laboring for Freedom: A New Look at the History of Labor in America. Armonk, N.Y.: M. E. Sharpe, 1998. Krajewski, Lee J., and Larry P. Ritzman. Operations Management: Strategy and Analysis. 3d ed. Reading, Mass: Addison-Wesley, 1992. Chapter 6 discusses technology management as applied to both the service and manufacturing sectors. Part of the emphasis in this chapter is linking technologies with strategic choices. The chapter covers such topics as electronic data interchange, office automation, and managing technological change. Noble, David F. Forces of Production: A Social History of Automation. New York: Oxford University Press, 1986. An extremely thorough treatment of the development of automation from the perspective of technological history. The author notes the social factors that influenced the choices made in determining the form that automation technologies would take. An underlying theme in the book is the impact of technology on the labor/management conflict. Schonberger, Richard J., and Edward M. Knod, Jr. Operations Management: Improving Customer Service. 4th ed. Homewood, Ill.: Irwin, 1991. Chapter 3, “Product, Service, and Process Planning,” focuses on the selection of process technologies. The chapter describes alternatives for automation and emphasizes the way in which human potential is influenced by automation. Mark D. Hanna Cross-References Ford Implements Assembly Line Production (1913); American Firms Adopt Japanese Manufacturing Techniques (1980’s); CAD/CAM Revolutionizes Engineering and Manufacturing (1980’s); Electronic Technology Creates the Possibility of Telecommuting (1980’s). 394

THE U.S. SERVICE ECONOMY EMERGES The U.S . Service Economy Emerges

Categories of event: New products and labor Time: The 1960’s Locale: The United States In the aftermath of World War II, the United States economy evolved from one based on manufacturing to one based on services Principal personages: Ray Kroc (1902-1984), the entrepreneur responsible for the success of McDonald’s Steven Jobs (1955), a founder of Apple Computer Stephen Wozniak (1950), a founder of Apple Computer Walt Disney (1901-1966), the founder of Walt Disney studios, the products of which provided the basis for theme parks Kemmons Wilson (1913), the founder of the Holiday Inn motel chain Summary of Event American manufacturing, emergent after the victory of Republican policies in the Civil War and symbolized by the smokestack, came to dominate the world’s economy, especially in the period after World War I. Big industry benefited from ample supplies of fuel and iron as well as from the protection of oceans and tariffs that stymied competition. Industry focused on the conquest of time and space, meaning railroads and later automobiles. After World War II, the development of a mass market based on consumer culture meant more factories, long production runs, well-paid labor, a higher standard of living, and abundant consumer goods. By 1990, however, the census reported that more than 73 percent of Americans worked in the service sector. More than 70 percent of gross 395

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national product (GNP) came from services and from the production of intangibles such as entertainment, education, health care, hospitality, and financial services. The symbols of progress were no longer smokestacks but computers, films, hospitals, and universities. Service industry factories look more like universities than like the industrial complexes of the early twentieth century that foreigners came to admire and copy. How and why has this transformation occurred? No single dramatic event or product marked the emergence of services. The advent of the service economy can be tied neither to introduction of the mainframe computer after World War II nor to the rise of the personal computer in the early 1980’s, though both facilitated the standardization and hence expansion of services. Nor is it linked directly to the television set, which took mass culture from the theater to the home, or to the first McDonald’s restaurant. Most of the services provided in the service economy had been provided for decades or longer. Professionals such as doctors, lawyers, and accountants had existed for centuries, as had colleges, restaurants, and hotels. It is useful to see the contemporary dominance of services as a culmination of a series of patterns that converged after World War II. Part of the shift to a service economy in the United States came from the movement of manufacturing abroad, particularly to Latin America and the Far East, where labor cost far less than in the United States. Thus, for example, Japan came to dominate electrical appliances in the 1950’s and 1960’s. Later, as Japanese labor costs rose, the country moved to high tech consumer electronic goods and captured about one-fourth of the American automobile market. Japan built its initial cost advantage into a reputation for solid performance in technology and quality. It is a good example of another country undergoing adaptation. Asia became a primary source of clothing for the mass market by employing low-wage workers. Important in nurturing America’s service economy have been labor-saving technological changes that have not only increased manufacturing output but also created new jobs in the service sector for technicians and repair people. The postindustrial impetus toward services has come in part from the changing demographics of the United States, particularly from the largest population explosion in the history of the United States, the baby boom. Born between 1945 and 1964, the baby boom group became the besteducated and most affluent population segment ever. Affluence came both from education and training and from the first major movement of women into business. The advent of the two-career family was impetus for the conversion to a service economy. As far as services involve hiring others to do things that people used to do for themselves, the two-career family has, by dint of increased disposable income and lack of disposable time, gener396

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ated a flourishing service economy performing tasks from day-care to cooking. The proliferation of services has also stemmed in part from government activities, especially the deregulation of the 1980’s, which brought competition into services. In financial services, for example, the Depository Institutions Deregulation and Monetary Control Act of 1980 began erasing the distinctions between commercial banks, savings and loan associations, and credit unions. These organizations became more visible, more competitive, and consequently market driven. They opened more branches in attempts to reach more customers, and thus needed more employees. Airline expansion stemmed from similar causes. Airlines used to fly when and where they were allowed by the Civil Aeronautics Board; now they fly wherever they can make money. Some competed through lower prices, but many offered improved service, which meant more workers. Expansions of schedules added jobs. Court decisions and Federal Trade Commission regulations also helped bring services to prominence. For example, lawyers never advertised before 1978. Restrained by traditions reinforced by law, legal professionals “advertised” most commonly by running for office. The decision by the Supreme Court in Bates v. State Bar of Arizona (1979) permitted lawyers to advertise. The legal profession expanded tremendously, but cause may be difficult to untangle from effect. Law schools had ever-larger classes, so that nearly half of all attorneys practicing in 1990 had graduated after 1980. It is possible that the market demanded these attorneys but also possible that the new attorneys needed to advertise to create a market. Perhaps the greatest changes in the nature of services have been their standardization and automation. Service-oriented businesses could grow from local firms serving local (sometimes protected) markets to global companies serving the world once they standardized. Traditionally, services are considered to have four properties that distinguish them from goods: they are intangible, heterogeneous (that is, they vary from producer to producer, and even a single producer may not be consistent), produced and consumed simultaneously (the creation of the haircut is when the hair is cut), and perishable. Given these traditional distinctions between services and goods, the lack of proprietary technology (all airlines can clothe employees in designer uniforms and serve drinks in flight), and short channels of distribution in services, the emergence of national and American firms serving worldwide customers can be viewed as nothing short of a major, if not revolutionary, industrial shift. In a sense, services grew because of the use of information technology to conquer time and space. Probably no single breakthrough has aided establishment of a national network of services more than has the computer, 397

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for it enabled what were once personal services to be conducted at a distance. Computer linkages, for example, made possible multisite and multinational operations in transportation and leisure that were previously possible only locally and on a small scale. Even the National Park Service has campground reservations listed through Ticketron, so people around the country can easily guarantee reservations. Similarly, the automatic teller machine has enabled financial service institutions to break down geographical and time barriers, making it convenient to perform more banking transactions. Although a teller is not directly involved, each transaction does create work. One major mechanism for the expansion of services has been the franchise, which has erased geographical barriers. From hotels to restaurants, from hairdressers to muffler shops, the “McDonaldization” of America—the national provision of standardized services—is well under way. Franchises have erased geographical barriers, replicating successful local businesses on a national scale. They have simultaneously depersonalized many industries that still require personal contact between service provider and customer. McDonald’s has become the largest-volume chain in most of the countries it serves, including Japan, by turning to a production-line approach to deliver consistent quality everywhere. Franchising also provided a relatively inexpensive and less risky means for entrepreneurs to get started, prompting more start-ups. Buyers know what they are getting when they purchase a franchise and do not have to invent a new product. Impact of Event A location that may exemplify the shift from agriculture to industry, then to services, is Bloomington-Normal, Illinois. The twin cities typify the origins of many American urban areas as commercial and political centers rising out of farmlands. The arrival of the railroads in the 1860’s fostered the development of local businesses that served a national market, as well as allowing distribution of goods from across the country in the local market. One of the biggest businesses was the railroad itself. This opening of markets made a national name in the 1880’s for Dr. Wakefield, a producer of pharmaceutical nostrums (one of the earliest branded and nationally distributed consumer goods), and in the 1920’s for the Williams Oil-oMatic, a low-pressure oil furnace that boasted of making Bloomington the cleanest city in the United States. Following World War II, however, railroad traffic declined to the point at which the railroads closed the repair yards that were the region’s largest single employer. Although townspeople worried that the changing economic base presaged economic decline, what followed instead was the 398

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burgeoning of services. Two of the largest employers were State Farm Insurance, begun to serve farmers in need of automobile coverage in 1922 and eventually America’s largest property and casualty insurance company, and Illinois State Normal University, a small state college built in 1857 to train teachers. It grew from an enrollment of three thousand in 1959 to nearly twenty thousand a decade later, as baby boomers sought an education. Although these two businesses predate the service revolution, their growth coincided with it. Furthermore, by 1963, more than 40 percent of the major companies in the area were less than twenty years old, indicating that new companies were forming in the new environment. In short, what happened to Bloomington-Normal was a major shift from agriculture to manufacturing, then from industry to services. This occurred elsewhere in America, and on the same scale. Other countries have followed. In 1900, less than 20 percent of the American workforce was employed in white-collar jobs, while more than 30 percent derived primary income from farming. By 1960, nearly half of the workforce was white collar, while fewer than 6 million of the 74 million workers made their living from farming. By 1989, only 3 million of the 117 million workers derived their income from farming; 30 million held managerial and professional positions; 51 million claimed income from technical support and traditional service jobs in health care, food service, and household maintenance; and only 18 million were classified as manufacturing personnel. The dominance of service in the American economy has made a major difference in the way Americans work and live. For example, most central cities have declined in population, while suburban areas have grown as workers no longer need to be near manufacturing centers. Service businesses tend to be “flatter,” with fewer levels of management than manufacturing organizations. This is a response to the simultaneous production and consumption of the service and allows service firms to be more responsive. In the early 1990’s, manufacturing became more like service industries by providing more customized products on shorter deadlines. Customers have learned to expect high levels of service, whether from service firms or from manufacturers. Bibliography Bateson, John E. G. Managing Services Marketing: Text and Readings. 2d ed. Fort Worth, Tex.: Dryden Press, 1991. Most of the textbooks on managing or marketing services are compilations of readings. This contains an excellent selection of articles that illustrate the problems of managing service industries. Some readings are geared toward advanced M.B.A. students and will stretch the average undergraduate. Berry, Leonard L., and A. Parasuraman. Marketing Services: Competing 399

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Through Quality. New York: Free Press, 1991. Berry and Parasuraman are leaders in exploring the nature of services and particularly in defining quality services. This book distills many of their previous articles and advances an integrative framework in chapter 1 that ties together much of the previous literature. Hartley, Robert F. Marketing Successes, Historical to Present Day: What We Can Learn. 2d ed. New York: John Wiley & Sons, 1990. No student of marketing history should miss Hartley’s volumes on successes and failures. This volume describes Penney’s, the supermarket (King Kullen as pioneer), Korvette, McDonald’s, Kmart, Hyatt Legal Services, and Apple Computer, among others. Although there is little depth, the articles are well written, and the stories are quite engaging. Peters, Thomas J., and Robert H. Waterman, Jr. In Search of Excellence: Lessons from America’s Best-Run Companies. New York: Harper and Row, 1982. This is the best-selling business book of all time. Although somewhat dated, it provides an interesting framework for evaluating successful companies. Readable and understandable, it highlights some service companies such as McDonald’s and Disney. Ritzer, George. The McDonaldization of Society: An Investigation into the Changing Character of Contemporary Social Life. Newbury Park, Calif.: Pine Forge Press, 1993. Ritzer is a sociologist who views the “McDonaldization” of society with a great deal of skepticism, as enshrining homogeneity and mediocrity at the expense of variety, individualism, and excitement. Worthy, James C. Shaping an American Institution: Robert F. Wood and Sears, Roebuck. Urbana: University of Illinois Press, 1984. Worthy, a professor of management, served from 1938 to 1961 with Sears, Roebuck. He explains how and why Sears succeeded. Zemke, Ron, with Dick Schaaf. The Service Edge: 101 Companies That Profit from Customer Care. New York: New American Library, 1989. Although this book is largely anecdotal, it is readable and insightful. The examples range from Chicken Soup, a day-care center in Minneapolis, to such well-known giants as Wal-Mart and American Airlines. Half the book deals with principles, the other half with companies, arranged by industry. Frederick B. Hoyt Cross-References Carter Signs the Airline Deregulation Act (1978); American Firms Adopt Japanese Manufacturing Techniques (1980’s); Electronic Technology Creates the Possibility of Telecommuting (1980’s); Congress Deregulates Banks and Savings and Loans (1980-1982); IBM Introduces Its Personal Computer (1981); A Home Shopping Service Is Offered on Cable Television (1985). 400

THE AGENCY FOR INTERNATIONAL DEVELOPMENT IS ESTABLISHED The Agency for InternationalD evelopment Is Established

Categories of event: International business and commerce; government and business Time: November 3, 1961 Locale: Washington, D.C. The Agency for International Development coordinated U.S. foreign assistance programs and expanded private sector investments in developing countries Principal personages: John F. Kennedy (1917-1963), the president of the United States, 1961-1963 Everett M. Dirksen (1896-1969), a Republican senator from Illinois Allen J. Ellender (1890-1972), a Democratic senator from Louisiana Harry F. Byrd (1887-1966), a Democratic senator from Virginia Bourke B. Hickenlooper (1896-1971), a Republican senator from Iowa Summary of Event The Agency for International Development (AID) provided the framework for central coordination of U.S. foreign assistance programs. As a quasi-autonomous agency within the Department of State, AID symbolized the institutional consolidation of foreign assistance as a tool in U.S. foreign policy. AID provided the bureaucratic pivot for the apportionment and delivery of benefits under the Foreign Assistance Act of 1961 and for the containment of communism abroad. 401

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Congress passed the Foreign Assistance Act (Public Law 87-195) to promote the foreign policy, security, and general welfare of the United States, and to assist the less-developed areas of the world in achieving self-reliance and economic development. On the basis of the act and the recommendations of the presidential task force on foreign economic assistance, AID came into existence by Executive Order 10973 of November 3, 1961. The creation of AID a was milestone in American foreign assistance, which began as a stopgap measure and gradually acquired institutional permanence as a tool of economic diplomacy. The earliest offer of U.S. foreign assistance was in 1778, under Article I of the Treaty of Alliance, by which the United States agreed to render assistance to France in a war with England. A recognizable framework of global assistance did not emerge until after World War II. The Truman Doctrine conditioned U.S. bilateral and multilateral assistance in the postwar era. Prior to the establishment of AID, foreign assistance passed through multiple agencies established on the basis of postwar exigencies. These agencies included the Economic Cooperation Administration (1948), the Technical Cooperation Administration (1950), the Mutual Security Agency (1951), and the Foreign Operations Adminstration (1953). In 1955, the International Cooperation Administration (ICA) was established by Executive Order 10610 as a quasi-independent agency in the Department of State. In 1957, the Mutual Security Act authorized the Development Loan Fund (DLF), which became a corporation in 1958. The creation of AID in 1961 underscored the transitory nature of its predecessors and brought stability to the programming and implementation of assistance. Congress abolished the ICA. Its functions, together with the DLF program, were inherited by AID. In 1962, AID assumed responsibility, in cooperation with the Department of Agriculture, for the Food for Peace program under the Agricultural Trade Development and Assistance Act (Public Law 480) of 1954. AID also consulted with other aid-providing agencies, including multilateral agencies, the Peace Corps, the Department of Defense, and the Export-Import Bank. AID’s development loan committee included the chairman of the Export-Import Bank so that lending policies would be coordinated. The act of 1961, much like the Act for International Development of 1950, responded to what President John F. Kennedy saw as a special moment in history by providing assistance to developing nations in their quest for self-reliance, economic growth, and political stability. Unlike previous instruments, however, the act deemphasized military assistance in favor of country-specific needs, long-range planning, self-help, and multilateral involvement in the developing countries. 402

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The administrative structure of AID, based on recommendations of the presidential task force, departed significantly from previous arrangements. Four regional bureaus, headed by assistant administrators, were created for Latin America, Europe and Africa, the Near East and South Asia, and the Far East. The regional administrators worked in cooperation with mission directors and ambassadors in the beneficiary countries. A range of specialized offices and advisory groups provided depth and definition to programs. The basic resources for assistance included development loans, grants and technical cooperation, supportive assistance, contingency funds, food, surplus government stockpiles of materials, and private-sector resources. AID’s priority shifted to long-term development assistance, including support for the Alliance for Progress, formed in 1961 to improve the quality of life in Latin America through loans, grants, and technical cooperation. The premise for assistance remained fairly consistent over the years. U.S. policy requires beneficiaries of development assistance to show progress toward self-reliance or the capacity to reach that point. Program loans, which may cover payments for imports, appropriately strengthen privatesector efforts and governmental initiatives. Project loans cover specific capital projects from design to completion. Development assistance has been based on a recipient country’s ability to mobilize available resources, both domestic and external. Development grants and technical cooperation provide specialist and other technical support and do not substitute for development loans. Generally, grants and technical cooperation have gone toward the development of education, agricultural extension, health service, sanitation, and general welfare. As with other programs, assistance is based on the strategic interests of the United States, including the impact of aid on the domestic economy. AID will consider whether a country has alternative sources of assistance. Developing nations have received bilateral and multilateral assistance from other sources, including the European Organization for Economic Cooperation and Development (OECD), through its Development Assistance Committee. Supportive assistance provides loans and grants for internal security, defense, capital expenditure for relief, and projects that contribute to economic growth or political stability. The military aspect ordinarily involves the Department of Defense. AID’s Economic Support Fund supports countries and areas unable to meet the specific criteria for development assistance. The support is based on the strategic and foreign policy interests of the United States and often is a preliminary step toward an offer of longterm assistance. 403

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Impact of Event Foreign assistance programs provided a platform for the expansion of U.S. private direct investment in developing areas. AID encouraged and nurtured private-sector participation in long-term assistance projects and worked to harmonize business goals with the developmental aspirations of the beneficiary countries. AID’s policies steered developing economies toward long-term growth, self-reliance, and the traditions of Western capitalism. Because development assistance involved the monitoring of programs and projects in recipient countries, foreign assistance provided a vehicle for the achievement of foreign policy objectives. The programs supported efforts of policymakers to integrate precapitalist economics into the free enterprise system. The effort, however, was at a cost to private U.S. investors, whose assets in foreign countries became the target of expropriation in the 1960’s and 1970’s. In developing areas, the sudden influx of foreign investment and aid elicited nationalistic sentiments and reactions. Between 1961 and 1975, there were 260 reported cases of investment disputes arising from the expropriation of U.S. private investments in Africa, Asia, Latin America, and the Middle East. Third World economic nationalism led to capital disinvestments as well as efforts among the capital exporters to establish a regulatory mechanism for the protection of foreign investments. In 1969, Congress authorized the establishment of the Overseas Private Investment Corporation for the purpose of providing investment guarantees and other services to business proprietors in developing countries. AID, on its part, provided a package of incentives and investment guarantees to investors, including subsidies for feasibility surveys, dollar loans, local currency (Cooley) loans under Public Law 480, and investment guarantees. A specific-risk guarantee covered such risks as the inconvertibility of foreign currencies, confiscation, expropriation, or loss of investment resulting from war or insurgency. Extended-risk guarantees protected investments from political and unusual investment risks. The incentives contributed to the expansion of private-sector participation in foreign development. The Office of Development Finance and Private Enterprise prepared entrepreneurs for foreign investment. The Development Loan Committee, headed by AID’s administrator, formulated lending policies and standards for profitable investment. The office worked with AID’s regional bureaus to promote trade and investment. Because aid was tied to trade, U.S. domestic exports and industrial capacities expanded with foreign assistance. Under the programs, beneficiary countries purchased capital goods and services from U.S. sources 404

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except when technical or other factors necessitated otherwise. In the 1980’s, however, AID increasingly nudged beneficiary countries toward self-reliance by encouraging and sustaining local productivity and privatesector enterprises. AID supported the privatization of state-owned enterprises in developing countries. AID afforded American investors the opportunity to expand abroad. More than any other nation, the United States provided developing nations with the capital base for economic growth. In the fiscal year of 1962, the transitional period, Congress appropriated a total of $4.515 billion in assistance, including $600 million for Latin America. In 1961, bilateral assistance to developing areas from France, Germany, the United Kingdom, Japan, Belgium, Italy, Portugal, Canada, and The Netherlands combined amounted to $1.986 billion in loans and grants. By 1985, the value of U.S. bilateral assistance exceeded $12 billion. The Development Fund for Africa has tackled food deficit and development barriers on the continent. Under Titles II and III of Public Law 480, surplus stockpiles of food were applied, with significant success, to relief and economic assistance in the developing areas. AID’s administrator has coordinated international disaster assistance. AID programming has enhanced the status of women abroad. The Office of Women in Development, which implements the mandate of Congress for inclusion of women in the development process, ensured that programs of assistance gave both urban and rural women ways of participating in the economic development process. Housing programs have supported urban development and housing investments in Latin America, Asia, and other developing areas. In the 1970’s, rural development projects expanded. The agency developed schemes for commercial home ownership for medium-to low-income families. In spite of criticism of AID as a pork-barrel agency and dispenser of charity with strings attached, the agency has been a crucial contributor to the economics of international development and the dissemination of U.S. business traditions abroad. Of crucial importance is the fact that aid appropriations give Congress a measurable influence and oversight in the conduct of foreign policy and the direction of U.S. private investments overseas. Within the U.S. domestic economy, AID’s development mission has adopted affirmative action policies in favor of enterprises owned by women and members of other disadvantaged groups. Under the Gray Amendment of 1984, as amended in 1990 and 1991, Congress set aside 10 percent of AID’s primary and subsidiary contracts for small or disadvantaged U.S. firms and for qualified educational and voluntary organizations. AID’s 405

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Office of Small and Disadvantaged Business Utilization worked with the Small Business Administration and other agencies to optimize the involvement of “minority” firms in direct-contract programs. Bibliography Chilcote, Ronald H., and Joel C. Edelstein, eds. Latin America: The Struggle with Dependency and Beyond. Cambridge, Mass.: Schenkman, 1974. The analyses are thought provoking and show the extent of problems to be overcome by Latin American states in their search for economic stability. Cohen, Stephen D. The Making of United States International Economic Policy. New York: Praeger, 1977. Provides in-depth analysis of factors and considerations that have shaped U.S. foreign economic policy over the years. Duignan, Peter, and L. H. Gann. The United States and Africa: A History. New York: Cambridge University Press, 1984. See chapter 22 for a summary and insightful discussion of U.S. economic and other assistance to Africa, including aid. Parrini, Carl P. Heir to Empire: United States Economic Diplomacy, 19161923. Pittsburgh: University of Pittsburgh Press, 1969. Offers good background reading and excellent perspectives on early application of economic resources to diplomatic goals. Tendler, Judith. Inside Foreign Aid. Baltimore: Johns Hopkins University Press, 1975. Useful analysis. Helpful in understanding the scope and implications of economic and development assistance, as conditioned by politics and national interest. Thorp, Willard L. The Reality of Foreign Aid. New York: Praeger, 1971. Sheds light on the benefits and burden of foreign assistance for the donor and the beneficiary. Todaro, Michael P. Economic Development in the Third World. 4th ed. New York: Longman, 1989. Identifies and discusses the patterns and problems of economic development in developing areas, including global efforts to meet the challenges and prospects of development in the Third World. Wennergren, E. Boyd, et al. The United States and World Poverty. Cabin John, Md.: Seven Locks Press, 1989. Contains useful discussions and quantitative data on global growth patterns, including income distribution, agricultural output, and food supply. Satch Ejike

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Cross-References The Truman Administration Launches the Marshall Plan (1947); The General Agreement on Tariffs and Trade Is Signed (1947); Eisenhower Begins the Food for Peace Program (1954); Mexico Renegotiates Debt to U.S. Banks (1989); The North American Free Trade Agreement Goes into Effect (1994).

407

CONGRESS PASSES THE EQUAL PAY ACT Congress Passes the Equal Pay Act

Category of event: Labor Time: 1963 Locale: Washington, D.C. The Equal Pay Act attempted to bring equity to the setting of wages for women, bringing them to equality with men’s wages for identical work Principal personages: John F. Kennedy (1917-1963), the U.S. president who launched the Equal Pay Act Wayne Morse (1900-1974), a 1940’s congressional advocate of equal pay for women Claude Pepper (1900-1989), a 1940’s supporter of equal pay Eleanor Holmes Norton (1938), the chair of the Equal Employment Opportunity Commission in the 1970’s Millicent Garrett Fawcett (1847-1929), a feminist and advocate of equal pay Lyndon B. Johnson (1908-1973), the president of the United States, 1963-1969; a strong supporter of equal rights Summary of Event Late in the spring of 1963, the Equal Pay Act was signed into law by President John F. Kennedy. The president had lent his support to the bill in 1962. In about 150 words, the act placed a federal ban on the payment of unequal wages to women and men who performed the same work. The proposed wording of the bill called for equal pay for “work of comparable quantity and quality,” a concept of “comparable worth” that remained in debate into the 1990’s and one that was excised before the act’s passage. 408

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The act ended one phase of a long struggle and opened a fresh phase that presidents, Congress, and the federal courts would continue to define for the next thirty years. Agitation for equal pay for men and women had a venerable history. In opposition to the prevailing wisdom of leading political economists and contrary to the practices of nearly all businesses, a number of British feminists, notably Dame Millicent Garrett Fawcett and Eleanor F. Rathbone, championed versions of Feminist leader Millicent Fawcett. (Library of Con“equal pay for equal work” gress) during the late nineteenth and early twentieth centuries. In the United States, incorporating the demands of American feminists that dated from the 1840’s, the National Labor Union took up the cry in 1867. Most change, however, resulted from the varied impacts of the Great Depression and from the experiences attending American involvement in World War I and World War II. During the wars, millions of women occupied jobs previously dominated by men. It was during war years that policymakers nationally began grappling with the issues presented by equal pay reform and the broader problems of gender discrimination in the workplace. Michigan and Montana, for example, enacted equal pay laws in 1919, and several industrial states followed suit between 1942 and 1945, with the active backing of substantial elements of organized labor and of management. Skeptical observers concluded that widening acceptance of equal pay principles resulted from an assumption that there would be full male employment. There was no doubt that the federal government actively worked to implement equal pay. This was true particularly of the War Labor Board, which through its General Order #16 in 1945 authorized equal pay for women and men doing work of comparable quality and quantity under the same or similar conditions. In many firms where women replaced men during wartime, equalization of wage rates did occur. Wartime advances toward equal pay gave way, however, to two sub409

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sequent decades of almost no progress, in regard not only to equal pay but also to other forms of gender discrimination in the workplace. By 1962, amid general social unrest centered on eradicating the worst abuses of racial discrimination and expanding a whole range of civil rights, the originally reluctant Kennedy Administration was prepared to move forward. Politically, the positions of the president and Congress were strengthened by vast increases in the employment of women, who accounted for one-third of the workforce in 1960, and by changes in the lives of American women. More women were divorced, and more were dependent on their own earnings to maintain themselves or their families. There also was a strong national demand for greater social justice. The fact that by the early 1960’s twenty-six states and a number of cities had passed equal pay acts reflected these popular sentiments. Legislatively, equal pay laws were no longer novelties. There was little opposition, consequently, when the equal pay bill was introduced to the House of Representatives, and scarcely any debate in the Senate. Labor unions, eager to shield male workers from lower-paid female competition, lent their support to wage equalization as a step toward job security. Employers seemed unaware of or unconcerned with what in many ways appeared to be a piece of noninterventionist legislation that, in any event, would prove difficult to apply to the distinctive conditions prevailing among millions of employers. Certain characteristics distinguishing female employment were incontrovertible. Scores of statistical studies plotted across wide as well as discrete segments of the economy indicated that women’s earnings, on average, typically were 60 percent of men’s. The disparity was overwhelmingly clear for jobs in which women performed the same tasks and bore essentially the same responsibilities as did men. In addition, studies of the workforce confirmed that women were heavily segregated in specific and relatively low paying positions such as those in nursing, teaching, service, and secretarial fields. These facts provided the salient rationale for passage of the Equal Pay Act. What the act sought to achieve was wages for women equal to wages earned by men doing the same or similar work. A source of subsequent, vigorous, and persistent complaint for the future was that the act had nothing to declare about equal wages for women performing different work requiring equivalent skill and training, that is, engaged in work of “comparable worth.” Impact of Event Pressed to passage by the administration of President Lyndon B. Johnson, the 1964 Civil Rights Act furnished the judicial testing ground for the legality of the Equal Pay Act and various forms of discrimination in 410

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employment practices and procedures as well as in the workplace itself. Federal authority to correct employment discrimination, including discrimination in regard to wages, derived chiefly from expansive judicial interpretations of the “commerce clause” of the U.S. Constitution (article I, section 8, clause 3). The wording of Title VII of the Civil Rights Act represented a comprehensive step by federal authorities toward establishing equal employment opportunity. It prohibited employment discrimination on the basis of race, color, religion, and national origins, and for the first time in any civil rights act it named sex as a basis on which employers could not discriminate. As viewed by women’s rights advocates and many other civil libertarians, this represented a remarkable accomplishment. Ruth Bader Ginsburg, a distinguished attorney who joined the U.S. Supreme Court in 1993, noted that in the past the Supreme Court had uniformly refused to alter sexually discriminatory practices. Thus women legally had been prevented from serving on juries and barred from many occupations, from law to bartending. Furthermore, despite the considerable gains made for civil liberties during the 1950’s and 1960’s, almost nothing had been achieved at the national level to equalize women’s employment opportunities. Indeed, from the 1860’s until 1971, gender discrimination was implicitly sanctioned by the Constitution. After 1969, with the ascent of Warren Burger to the Chief Justiceship of the United States, sex barriers to equal employment opportunity began crumbling before the impact of fresh Court decisions. The campaign for equal pay for women that had last manifested vigor during the 1940’s showed signs of revival, thanks to initiatives by congressmen such as Wayne Morse of Oregon and Claude Pepper of Florida. Legislators were under the lash of the National Committee on Equal Pay, the National Organization for Women, trade unions, and proponents of the Equal Rights Amendment. The opinions of these groups not only created new legislative mandates but also likely influenced the direction taken by the Burger Court. In any event, the Burger Court recognized that, like race, sex had been a source of pervasive and often subtle discrimination. Proof that this was the Court’s general perception came in the first of its gender discrimination cases based on Title VII of the 1964 Civil Rights Act. Phillips v. Martin Marietta Corporation was decided unanimously on January 25, 1971. Ida Phillips began her suit in a federal district court in Florida, claiming that the Martin Marietta Corporation had denied her employment because of her sex. Specifically, Martin Marietta had refused her job application on the grounds that it was not accepting any applications from women with preschool-age children. When Phillips applied to Martin 411

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Marietta, the company routinely employed men with preschool-age children. In addition, of the applicants who filed for the position sought by Phillips, more than 75 percent were women, and 80 percent of those hired for the job of assembly trainee had been women. No argument was made that Martin Marietta had shown a bias against women as such. Accordingly, the district court decided in favor of Martin Marietta. The case was then called before the Supreme Court on a writ of certiorari, an order by a higher court to review the finding of a lower court. In the Phillips case, the Burger Court ruled that an employer willing to hire fathers of preschool-age children, but not mothers, was guilty of sex discrimination under section 703(a) of the 1964 Civil Rights Act. A Court majority thought that only if the existence of conflicting familial obligations was more relevant to job performance for a woman than for a man could it decide otherwise. That would have called for evidence showing that “a bona fide occupational qualification reasonably necessary” to the normal operation of a business was involved. Such evidence was not before the Court. As a result of the Court’s interpretation of the antidiscrimination provisions of Title VII in the Phillips case, the relatively weak employment discrimination provisions of the Equal Pay Act appeared to have been significantly strengthened. The intent of Congress in passing the Equal Pay Act, as summarized by members of the House of Representatives’ Special Subcommittee on Labor, was that men and women doing the same job under the same working conditions would receive the same pay. Subsequent to the Phillips decision, the courts stuck closely to effecting congressional intent and eschewed arguments that would have allowed comparisons of jobs that were different but required similar levels of effort, skill, and responsibility. By the 1980’s, however, the battle for pay equity for women had been transformed into a struggle for payment to women on the basis of a difficult to define and controversial concept, that of comparable worth. Champions of pay equity believed that men and women should draw the same pay for the same work. Comparable worth advocates went further. Noting that women were segregated into certain occupations that on average paid less than occupations employing primarily men, they called for rethinking and reevaluating traditional ideas about the labor market. They pointed out the fact that traditionally female occupations such as nurse and librarian required more education, training, skill, and responsibility than many higher paying male-dominated jobs and objected to this inequity. At the close of the 1980’s, there were signs of progress. Federal legislation and that on local levels, along with judicial decisions, had made gender-based employment discrimination illegal. In addition, more than 412

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half of the American workforce was composed of women. Actions by the American Federation of State, County, and Municipal Employees, to cite one example, had raised women’s wages in the City of Los Angeles by placing wages of female secretaries, clerks, and librarians in line with the salaries of male gardeners, truck drivers, garage attendants, and maintenance personnel. Nevertheless, observers and many detailed public and private studies confirmed that a majority of working women filled jobs in occupations that were 75 percent female and that women held 80 percent of American service jobs, traditionally low on the pay scale. Ample evidence also indicated that full-time female employees earned only about 60 percent of the wages earned by full-time male employees. In addition, studies in several states showed that about 70 percent of state employees in the highest paying jobs were male. Many scholarly observers and civil libertarians agreed that the working woman’s situation was in substantial part a result of sex discrimination. Bibliography Fogel, Walter. The Equal Pay Act. New York: Praeger, 1984. A clear, informative, and critical survey of the origins and operations of the Equal Pay Act, with special reference to its influences on the comparable worth movement. Fogel questions whether social reform legislation, as opposed to market forces, works well. Ginsburg, Ruth Bader. “The Burger Court’s Grappling with Sex Discrimination.” In The Burger Court, edited by Vincent Blasi. New Haven, Conn.: Yale University Press, 1983. Crisp analysis of the subject. Gives high marks to the Burger Court’s decisions in sex discrimination. Contains profiles of Burger Court justices. Hutner, Frances C. Equal Pay for Comparable Worth: The Working Woman’s Issue of the Eighties. New York: Praeger, 1986. A fine comparative survey of pay equity and comparable worth in the United States, France, Canada, and Australia. Shows that costs of implementing comparable worth have been lower than feared by employers. Intelligent advocacy. Kelley, Rita Mae, and Jane Bayer, eds. Comparable Worth, Pay Equity, and Public Policy. New York: Greenwood Press, 1988. Superb, clear, and informative essays. A splendid survey of these subjects by a variety of experts who are balanced advocates of equity. Kessler-Harris, Alice. A Woman’s Wage. Lexington: The University Press of Kentucky, 1990. A clear, useful historical survey of pay equity, with emphasis on social consequences. Clifton K. Yearley 413

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Cross-References Roosevelt Signs the Fair Labor Standards Act (1938); The Civil Rights Act Prohibits Discrimination in Employment (1964); The Supreme Court Orders the End of Discrimination in Hiring (1971); The Pregnancy Discrimination Act Extends Employment Rights (1978); Firefighters v. Stotts Upholds Seniority Systems (1984).

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GPU ANNOUNCES PLANS FOR A COMMERCIAL NUCLEAR REACTOR GPU Announces Plans for a Commercial Nuclear Reactor

Category of event: New products Time: December 12, 1963 Locale: New York, New York General Public Utilities Corporation, the parent company of Jersey Central Power and Light, announced plans to construct the first commercial nuclear reactor to generate electricity Principal personages: Chester Holifield (1903-1995), a congressman from California; the vice chairman of the Joint Committee on Atomic Energy Dwight D. Eisenhower (1890-1969), the president of the United States, 1953-1961 Edward W. Morehouse (1896-1974), a vice president of General Public Utilities Corporation, in charge of the firm’s evaluation of applications of nuclear energy Hyman Rickover (1900-1986), the head of the U.S. Navy’s nuclear development program Louis H. Roddis, Jr. (1918-1991), a member of the U.S. Navy’s Nuclear Ship Propulsion Program and president of Pennsylvania Electric Company Lewis L. Strauss (1896-1974), the chairman of the Atomic Energy Commission, 1953-1958 Summary of Event On December 12, 1963, General Public Utilities Corporation (GPU), a utility holding company with operating properties in New Jersey and 415

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Pennsylvania, announced the company’s plan to build a nuclear generating plant in Oyster Creek, New Jersey. The plant was designed to produce electricity for Jersey Central Power and Light, a GPU subsidiary serving customers in the central portion of the state. The commercial nuclear generating facility was generally regarded as the first to be wholly privately financed. GPU’s announcement was greeted with approbation by President Lyndon B. Johnson, who declared, “it appears that the long promised day of economical nuclear power is close at hand.”

The Argonne National Laboratory in Illinois became the site of the first breeder reactor in the United States in 1951. (Argonne National Laboratory)

The GPU announcement was the part of the saga of nuclear power that began with the dropping of the atomic bomb on Hiroshima and Nagasaki in 1945. The creation of the atomic bomb was wholly a product of governmental research. Initially, all thought concerning nuclear power was focused on how to keep the secret of atomic weaponry from spreading to other nations. It was in the light of this preoccupation that the first legislation dealing with atomic energy, the Atomic Energy Act of 1946, required that the U.S. government retain ownership and control of all atomic facilities. The act created a new government organization to control all the government’s atomic activities, the Atomic Energy Commission (AEC). The 416

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government owned a variety of atomic installations and controlled all research into possible applications of atomic power, although much of the research and development was done through contracts with private companies, notably General Electric (GE) and Westinghouse, each of which had its own atomic laboratory. Further, the government retained ownership of all nuclear material. Pressure was already building, however, to find a peaceful use for this powerful new energy source. The creation of the AEC led to a new congressional committee, the Joint Committee on Atomic Energy, to oversee the work of the new commission. The committee, and particularly its vice chairman, Congressman Chester Holifield of California, was a strong voice for finding peaceful applications. The congressional agenda pushed the Atomic Energy Commission in the direction of seeking nonexplosive uses for atomic energy. The first step in the long process of adapting atomic energy for use in the generation of electricity was the formation, in 1949, of an Ad Hoc Advisory Committee on Cooperation between the Electric Power Industry and the Atomic Energy Commission. The chairman of the commission was Philip Sporn, a utility economist and the president of American Gas and Electric Corporation (later to become the American Electric Power System); the other two members were Edward W. Morehouse, also a utility economist and vice president of General Public Utilities Corporation, and Walton Seymour, another utility economist and director of the Power and Programs office of the Department of the Interior. The members of the committee received security clearances that enabled them to visit all the major atomic installations of the government except that at Los Alamos, New Mexico, which was wholly dedicated to weapons production. They consulted scientists at Argonne Laboratories, at Oak Ridge Laboratories (assigned the mission of leading the AEC’s research efforts into industrial applications of atomic power), Brookhaven Laboratories, Hanford (concerned primarily with the enrichment of uranium), the Knolls Atomic Power Laboratory (a GE facility dedicated to contract research for the AEC), and the Bettis Laboratory (a Westinghouse facility comparable to Knolls). Extensive consultation by the committee members with AEC scientists convinced them that the potential for civilian and commercial application existed. At the same time, much would need to be done in the way of research into a safe reactor form that could be produced at a cost competitive with fossil fuels. The chief advantage of nuclear generation would turn out to be the small size of its fuel compared to coal, making possible immense savings in fuel transportation costs. 417

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A major factor in the evolution of civilian nuclear power was the interest of the U.S. Navy, under the leadership of Admiral Hyman Rickover, in the development of small nuclear “engines” that could propel naval vessels, particularly submarines. Rickover assembled a group of scientists and engineers, including Louis H. Roddis, Jr., later to become an active participant in the GPU decision-making process as president of Pennsylvania Electric Company, a GPU subsidiary. In late 1947, intensive research efforts were begun in search of a suitable format for an atomic power plant for naval, especially submarine, use. These efforts bore fruit in 1953, when a prototype submarine-propulsion reactor was successfully tested at the National Reactor Test Station in Idaho Falls, Idaho. This reactor led directly to the propulsion units for submarines. This reactor also led directly to the pressurized-water and boiling-water reactors that became the predominant form of nuclear power plant for electricity generation in the United States. The Joint Committee on Atomic Energy seized on these developments as confirmation of its belief that a major effort directed toward the development of nuclear power reactors was justified. It pressured the Atomic Energy Commission to make a formal commitment to research dedicated to developing suitable forms for nuclear power generation. The administration of President Dwight D. Eisenhower, himself an advocate of the peaceful use of atomic power, strongly supported this agenda, which it labeled “atoms for peace.” Because there was concern on the part of the public about the safety of nuclear power, much of the research focused on safe operation. The problem was one of controlling nuclear fission so that only enough of a chain reaction occurred to keep the process going. Research focused on the safety factor rapidly led researchers to conclude that the safest design was either the pressurized-water reactor or the boiling-water reactor. In both types, the water used as a coolant quickly turned to steam and shut down the reaction. It was clear that the legislation passed by Congress in 1946 was too constraining to permit effective development of a nuclear power industry, especially one predominantly in private hands, as President Eisenhower’s administration ardently desired. Accordingly, the Atomic Energy Act of 1946 was replaced by a new Atomic Energy Act in 1954. This act authorized the licensing of private nuclear facilities by the AEC and permitted the AEC to furnish the nuclear fuels for such facilities, though the government retained ownership of the fuels. Armed with this enlarged authority, the AEC’s chairman, Lewis L. Strauss, created a demonstration reactor program, under which the AEC welcomed proposals for the construction of demonstration reactors on the part of private utilities. The utilities would 418

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finance, or at least contribute to, the capital costs, but the AEC would provide funds for research, development, and evaluation, and would also provide the nuclear fuel. A number of small-scale plants were built under this program. The first was a plant at Shippingport, in western Pennsylvania. The power generated there was supplied to Duquesne Light Company. Another early plant was commissioned by a consortium of New England utilities called Yankee Electric; it built a plant at Rowe, in western Massachusetts, that operated successfully for more than thirty years. All these plants were, however, of modest dimensions. They did provide the basis for cost studies that led to defining a goal of the utility industry of costs less than four cents for each ten kilowatt-hours generated. Intensive studies were carried out by both industry and the government to determine the costs of nuclear power generation. The basic question was how the cost of nuclear generation compared with that of coal-based power. All utilities performed cost studies, but among those most intensively studying costs were the officials of GPU. GPU’s operating plants had access to Pennsylvania coal, so the competitive factor was intense. The decision to go ahead with the Oyster Creek facility was based on the belief that the company could produce electricity below the cost of four cents per ten kilowatt-hours. Equally decisive was the successful negotiation with General Electric for a turnkey price for the Oyster Creek plant of $76.6 million. GE was able to offer such a proposition because it was a major producer of turbines and generators for utilities and eager to get in on the potentially profitable field of building nuclear power plants. In the early 1960’s, electricity use was increasing at a steady rate of about 3 percent per year, so GE could foresee a large demand for new electrical generating facilities. By signing on with Jersey Central for the construction of the Oyster Creek facility, GE opened for itself a potentially highly lucrative business, even though the early turnkey plants were probably constructed at a loss. Impact of Event The immediate impact of GPU’s announcement of the Oyster Creek project was the decision, on the part of eleven privately owned utilities, to embark on their own nuclear construction programs. By 1975, fifty-three civilian nuclear power plants had received operating licenses, and an additional sixty-three plant-construction licenses had been issued by the AEC. At that time, applications were pending for an additional seventy-four construction permits. In a short period of time, the American utility industry had made a major commitment to nuclear power. 419

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One of the conditions for the adoption of nuclear power cited by the Ad Hoc Committee on Cooperation Between the Electric Power Industry and the Atomic Energy Commission had been met: Standardized designs and a sufficient number of orders brought the capital costs down to a point at which nuclear power constituted an attractive investment on the part of the utility industry. Oyster Creek was built for a cost of $138 per kilowatt, a price that made a nuclear plant highly competitive with coal. The coal industry was galvanized by the announcement of the Oyster Creek facility. At the time of the announcement, the coal industry promptly indicated that, had it been aware of the announcement in advance, it would have offered a better price to the utility. In fact, faced with growing nuclear competition, the coal industry was driven to introduce numerous structural improvements, particularly new coal-cutting machinery, that enabled output per hour of labor in mines to double over the forthcoming five years. The emergence of civilian nuclear power as a reality gave a great boost to the government’s business of uranium enrichment. Pressurized-water reactors and light-water reactors require enriched uranium for successful operation. The government’s plants that had been enriching uranium for the production of plutonium for use in weapons now had a much larger demand for their services. The question surfaced of whether the government should continue to own all the uranium fuel. In 1964, the Private Fuels Ownership Act was passed by Congress. The act required the AEC to terminate its existing practice of leasing nuclear fuel to private utilities and abolished the ban on private ownership of nuclear fuel. The AEC would continue to provide enrichment services for a fee, but utilities would own the fuel they used. The government continued to buy back the plutonium that was a by-product of the operation of nuclear power reactors. Another important legislative action had already been taken in 1957, when the Price-Anderson Act was passed by Congress. The insurance industry had made clear that it would provide insurance against a catastrophic accident only up to a limit that the utility industry found to be inadequate coverage. The government agreed to provide backup insurance beyond the $60 million the insurance industry was ready to commit. The act was originally intended to last ten years, but in 1965, in anticipation of the operation of private nuclear generating plants, it was extended for another ten years, with the inclusion of a “no-fault” clause permitting immediate indemnification of anyone injured. It was clear that a major portion of the government’s role in the field of civilian nuclear energy would be licensing and regulation. This entailed several reorganizations of the AEC, resulting finally in its replacement by the Energy Research and Development Administration (which later became 420

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the Department of Energy) in 1974. The regulatory role was spun off to the Nuclear Regulatory Commission, the job of which it was to oversee the nuclear power industry. The Oyster Creek facility went on line in 1968. Its original rated capacity was 550 megawatts, but following a “run-in” or “stretch” period, as it was known in the industry, it was able to increase its capacity to 640 megawatts. That was the largest capacity contemplated when Oyster Creek was announced, but within a few years technology had advanced to the point at which thousand-megawatt plants were being ordered. Oyster Creek was the beginning of a whole new technology, one that has since spread to much of the industrialized world. The promise of a technology that could provide power at a cost below that of fossil fuels in most parts of the world was irresistible; Oyster Creek demonstrated its practicality. Safety and environmental issues, however, mitigated against widespread use. Bibliography Atomic Industrial Forum. Atomforum 64: Proceedings Atomic Industrial Forum 1964 Annual Conference. New York: Author, 1965. Contains speeches by Louis H. Roddis, Jr., and Chester Holifield, both celebrating the bright future for civilian nuclear power. Dawson, Frank G. Nuclear Power: Development and Management of a Technology. Seattle: University of Washington Press, 1976. A clear presentation of the stages in the development of nuclear power as a workable commercial technology. Contains a reasonably clear explanation of technical factors. Mullenbach, Philip. Civilian Nuclear Power: Economic Issues and Policy Formation. New York: Twentieth Century Fund, 1963. A critical review by a former Atomic Energy Commission economist of the decisions leading to the development of civilian nuclear power. Mullenbach argues that many of the decisions were made on strategic rather than economic grounds. Roddis, Louis H., Jr., and Daniel K. Park. “Nuclear Energy and the Electric Power Industry: Before and After Oyster Creek.” In Innovation and Achievement in the Public Interest, edited by Ward Morehouse and Nancy Morehouse Gordon. Croton-on-Hudson, N.Y.: Wayward Press, 1966. This account of the events leading up to the Oyster Creek project, together with some discussion of its consequences, is the most concise and informative story of the Oyster Creek facility. U.S. Atomic Energy Commission. Civilian Nuclear Power: Current Status and Future Technical and Economic Potential of Light Water Reactors. 421

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Washington, D.C.: Government Printing Office, 1968. This publication appeared just as the Atomic Energy Commission was winding down its research on light water reactors, on the ground that they had become a “proven” technology. Contains a list of civilian nuclear plants in operation and planned, as of 1968. Nancy M. Gordon Cross-References The Environmental Protection Agency Is Created (1970); The United States Plans to Cut Dependence on Foreign Oil (1974); The Alaskan Oil Pipeline Opens (1977); The Three Mile Island Accident Prompts Reforms in Nuclear Power (1979).

422

HOFFA NEGOTIATES A NATIONAL TRUCKING AGREEMENT Hoffa Negotiates a National Trucking Agreement

Category of event: Labor Time: January 16, 1964 Locale: Chicago, Illinois Jimmy Hoffa negotiated a National Master Freight Agreement consolidating his own power and that of his Teamsters Union Principal personages: Jimmy Hoffa (1913-1975), the brilliant, powerful, and corrupt leader of the Teamsters from 1957 to 1964 Robert F. Kennedy (1925-1968), a principal investigator and prosecutor of Hoffa and corrupt Teamsters Frank E. Fitzsimmons (1908-1981), a top Teamster official who succeeded Hoffa John L. McClellan (1896-1977), the chairman of Senate committees that investigated Hoffa and the Teamsters from 1957 to 1961 Daniel J. Tobin (1875-1955), an honest Teamster president who led a largely decentralized union for forty-five years Clark R. Mollenhoff (1921-1991), a Pulitzer Prize-winning journalist who helped expose Hoffa’s corrupt Teamster empire Summary of Event On behalf of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America (IBT), union president James R. “Jimmy” Hoffa signed the National Master Freight Agreement (NMFA) in Chicago, Illinois, on January 16, 1964. Labor experts, Teamster dissidents, and even many state and national officials who would later comment that 423

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Hoffa’s sensational disappearance (and probable murder) in 1975 was the best thing that could have happened to American trade unionism agree that the NMFA represented, from Hoffa’s perspective as well as from those of many Teamsters, his finest achievement. It was the first agreement to cover the trucking industry nationwide. The NMFA and its successive versions brought contractual uniformity to the wages, hours, and working conditions of 30 percent of the Teamster’s 1964 members, encompassing 450,000 intercity (or “over-the-road”) truckers and local carters. Despite local unions’ resistance to it in the San Francisco Bay area, in New York City, and in northern New Jersey, as well as qualifications to it in the form of regional supplements and local riders, the agreement paved the way for standardization of the wages and contracts of the rest of the membership. For Hoffa, the agreement, which was renegotiable every third year, consolidated his political position within the IBT and made him the chief collective bargainer for the nation’s largest trade union. Given Hoffa’s profound knowledge of the industries with which he dealt, his domineering personality, his exploitation of underworld and political alliances, and his unbridled ruthlessness, it bestowed unprecedented power upon him within the IBT at the same time that it gave the IBT unprecedented power within the American labor movement. Hoffa always generously acknowledged that if the attainment of a national agreement was his, the vision was that of Farrell Dobbs, a farsighted union leader in the Depression years and an obscure presidential candidate in early 1960’s. In the mid-1930’s, Dobbs, a Minnesota Trotskyite and leader of the Minneapolis Teamsters, successfully reached out to organize and integrate the much-despised and hard-pressed truck drivers of the Midwest into the North Central District Drivers Council, soon designated as the Central States Drivers Council (CSDC). Originally embracing thirteen local unions in the Dakotas, Minnesota, upper Michigan, Iowa, and Wisconsin, the CSDC under Dobbs’s guidance swiftly expanded to encompass forty-six locals. The tough young Hoffa was introduced to Dobbs late in the 1930’s by Red O’Laughlin, a Detroit teamster and friend of longtime Teamster president Daniel J. Tobin. Insofar as Hoffa espoused any political ideology, it was borrowed from Dobbs’s own, namely that the American economy was fated to endure cycles of depression and faced ultimate failure. Dobbs believed that trade unions ought to contribute to revolutionary change. At the peak of a promising union career, Dobbs abandoned unionism, later to lead the Socialist Workers Party. He imparted a number of invaluable lessons, some strategic, some tactical, to young Hoffa. Foremost was Dobbs’s insistence on establishing centralized areawide 424

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collective bargaining mechanisms through which to acquire uniformity in wages, hours, and working conditions for “over-the-road” truckers. Dobbs believed such centralization was mandated by the nature of the trucking industry, one characterized by ease of entry, low capital requirements, and tens of thousands of intensely competitive operators. In such circumstances, individual operators had little opportunity to pass increased costs to consumers through price hikes. They could lower their basic costs, principally labor, only by undercutting wages, increasing hours of work, or moving operations to low-wage areas. Dobbs believed that the harmful effects of this competition could be mitigated if uniformities were brought to the drivers’ wages, hours, and working conditions. Under common conditions, operators could raise their prices together and more readily pass their cost increases to consumers without traditional price wars, wage cuts, or changes of base. Tactically, Hoffa became a master of Dobbs’s techniques of leverage, or of using an employer or situation the union controlled to organize or to negotiate successfully with employers or other unions. Hoffa maximized advantages inherent in labor reform laws of the 1930’s. The federal NorrisLaGuardia Act of 1932, for example, contrary to the previous half century of antilabor legislation emanating from all levels of government, legalized organizing campaigns conducted by means of picketing and secondary boycotts. The National Labor Relations Act of 1935 (Wagner Act) appended the principle of employee self-determination, permitting workers—under procedures stipulated by the National Labor Relations Board (NLRB), the quasi- judicial monitor of the act—to select or reject, by secret ballot vote, unions attempting to represent them. Labor reforms, in short, legalized certain types of economic coercion peculiar to the needs of a vigorous labor movement. To the leverages legally available, Hoffa and his cohorts added their preferred efforts to impose organization from the top down. They invoked their own forms of coercion, from questionable contract clauses to tertiary boycotts, beatings, and bombings. The sweeping centralization afforded by the NMFA, linked to the clout of the IBT and to a personality such as Hoffa’s, gave Hoffa and his union vast power. Impact of Event Several immediate consequences resulted from Hoffa’s centralization of Teamster authority in his own hands by virtue of the NMFA, within a union historically characterized by its decentralization and the substantial autonomy of its locals. Union membership had risen to 1.7 million by 1964 from 1.4 million in 1957, when Hoffa became Teamster president. By the time 425

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Hoffa left the union presidency for prison in 1967, three years after the first NMFA, the Teamsters had gained 300,000 members, only a minority of whom were truckers. Unionization had been extended, for example, to warehousemen, chauffeurs, bakers, and confectionery workers. In addition, as the Teamsters’ chief collective bargaining agent, Hoffa redrafted and shrewdly reinterpreted the union constitution to funnel the all-important, and politically exploitable, grievance procedures into his own office. Furthermore, but of vital importance. Hoffa extended and intensified his power over the Teamsters’ Central and Southern States Pension Fund (CSSPF). Despite the fact that Hoffa had become the Teamsters’ principal leader by 1954, three years prior to his election to the union’s presidency, he lagged far behind other major labor leaders in developing pension funds and in recognizing their economic and political potentials. Union-negotiated pensions had been pioneered a decade earlier, during 1944 and 1945, by the International Ladies’ Garment Workers Union, whose initiatives were swiftly followed by the International Brotherhood of Electrical Workers and by John L. Lewis on behalf of his United Mine Workers (UMW). The UMW’s defection from the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) forced the AFL-CIO leadership to respond with their own pension plan. In the light of favorable rulings by the NLRB and several judicial decisions, other major unions were soon pursuing similar courses. Hoffa clearly was aware of how to deploy the funds of local union treasuries and welfare trusts to buttress his personal empire, but he did not negotiate the Teamsters’ CSSPF, his first pension fund, until January, 1955. Thereafter, however, with characteristic astuteness, he learned to manipulate CSSPF moneys by grasping personal authority over their dispersal and investment and made these decisions his principal preoccupation. There was much to preoccupy him, for successive NMFA Teamster contracts with employers stipulated ever-rising employer contributions to the CSSPF. The $2 per week that employers paid for each employee in 1955 rose to $4 by 1960 and to $7 in 1964. By 1965, $6 million in such contributions flowed into the CSSPF monthly. The fund’s total value for the union’s 1.7 million workers had soared to $200 million. By 1967, the U.S. attorney general’s office and the nation’s courts had handed down 200 individual indictments against Teamsters and their allies, winning 125 convictions related mainly to Hoffa’s and other Teamster officials’ illegal uses of CSSPF funds. The ability to exploit the power inherent in this immense fund stemmed from Hoffa’s ability, thanks to this control over successive NMFA contracts, to control the Teamsters’ collective bargaining. Hoffa’s unprecedented labor empire and the many threats it posed were 426

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brought to the general public’s attention rather dramatically on several fronts. The menace of the IBT was already painfully evident to both union and nonunion workers, as well as to employers and employer representatives, who were victims of the Teamsters’ ostracization, intimidation, beatings, shootings, and bombings. Pulitzer Prize-winning journalist Clark R. Mollenhoff was among the first at the national level to expose Hoffa’s tentacles of power. He informed and advised congressional and other federal officials as they investigated Hoffa’s union. Public awareness was more broadly awakened by the persistent investigations of the McClellan committee (officially the U.S. Senate Select Committee on Improper Activities in the Labor or Management Field). Under the direction of Senator John L. McClellan, an Arkansas Democrat, the committee began hearings on January 30, 1957. Within two years, McClellan’s committee was able to bring eighty-two charges against Hoffa alone and to provide a political launching pad for the impressive investigative talents of Robert F. Kennedy, who would pursue Hoffa and other suspected labor racketeers after becoming the U.S. attorney general. To these activities should be added a nationwide televised speech by President Dwight D. Eisenhower calling for strong legislation designed to curb union excesses and racketeering. Legislative response came even as McClellan’s hearings proceeded. The Labor-Management Reporting and Disclosure Act (the Landrum-Griffin Act) of 1959, despite its sweeping title, was understood to be aimed chiefly at Hoffa and his Teamsters. The IBT possessed the economic capability to bring America’s most vital form of transport to a halt, paralyzing the nation’s economic life and thereby its well-being. Congress wanted some reins to be put on such a powerful union. Even with restraints in force and while under indictment, Hoffa was able to negotiate the NMFA. The labor reform legislation enacted between 1932 and the mid1940’s—in spirit mostly trusting and permissive by past comparisons—was altered by modifications following the lines of the Taft-Hartley Act of 1947. Sober questions were raised concerning how much union power the national welfare could tolerate and whether union “monopolies” ought to be subject to the full force of the country’s antitrust laws. Hoffa’s consolidation of power through the NMFA brought further concerns as well as achieving the practical purpose of standardizing the working conditions of truckers and ending some of the competition among them. Bibliography Franco, Joseph, with Richard Hammer. Hoffa’s Man: The Rise and Fall of Jimmy Hoffa as Witnessed by His Strongest Arm. New York: Prentice427

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Hall Press, 1987. Candid and colorful. Written by a voluble Hoffa admirer and organizer whose background of violence is characteristic of Hoffa’s associates, many of whom are depicted here. Photos, excellent index. Hoffa, James Riddle. The Trials of Jimmy Hoffa: An Autobiography. Chicago: Henry Regnery, 1970. Interesting, if self-serving. Politicians, judges, journalists, and others not “connected” with Hoffa are presented as wrong or confused. No reference features. To be read for balance and some color. Jacoby, Daniel. Laboring for Freedom: A New Look at the History of Labor in America. Armonk, N.Y.: M. E. Sharpe, 1998. James, Ralph C., and Estelle Dinerstein James. Hoffa and the Teamsters. Princeton, N.J.: D. Van Nostrand, 1965. An invaluable and unique inside scholarly study based on ninety days of close association with Hoffa in action and broad access to Teamster files. Admiring of Hoffa’s intelligence and abilities, but objectively raises serious questions about his use of power and money. Clearly written. Chapter notes, glossary, and good index. Moldea, Dan E. The Hoffa Wars: Teamsters, Rebels, Politicians, and the Mob. New York: Paddington Press, 1978. Exciting reading. The book began as a working thesis and became the author’s project for the National Broadcasting Company in the mid-1970’s. Detailed and informative insights into both Hoffa’s connections and his decline. Photos, brief chapter notes, excellent index. Updates aspects of Mollenhoff’s work. Mollenhoff, Clark Raymond. Tentacles of Power: The Story of Jimmy Hoffa. Cleveland: World Publishing Company, 1965. Superb reporting that earned the author a Pulitzer Prize. Relies heavily on Mollenhoff’s investigations and McClellan Committee testimony. An exciting, informative, and frightening read. Photos, notes, brief appendix, but no index. Outstanding objective damnation of Hoffa’s abuses of power. Clifton K. Yearley Cross-References The Norris-LaGuardia Act Adds Strength to Labor Organizations (1932); The Wagner Act Promotes Union Organization (1935); The TaftHartley Act Passes over Truman’s Veto (1947); The AFL and CIO Merge (1955); The Landrum-Griffin Act Targets Union Corruption (1959).

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THE KENNEDY-JOHNSON TAX CUTS STIMULATE THE U.S. ECONOMY The Kennedy-John son Tax Cuts Stimulate the U.S. Economy

Category of event: Government and business Time: February 26, 1964 Locale: Washington, D.C. On February 26, 1964, President Lyndon B. Johnson signed the Revenue Act of 1964, which was the first deliberate attempt to stimulate the United States economy by reducing taxes Principal personages: John F. Kennedy (1917-1963), the president of the United States at the time the tax cut was sent to Congress Lyndon B. Johnson (1908-1973), the president of the United States at the time the tax cut was enacted John Maynard Keynes (1883-1946), an economist who favored the use of government policy to control business cycles and manage the economy Wilbur Mills (1909-1992), the chairman of the House Ways and Means Committee when the tax cut was under consideration Walter W. Heller (1915-1987), the chairman of the Council of Economic Advisers under Kennedy and Johnson Clarence Douglas Dillon (1909-1992), the secretary of the treasury under Kennedy and Johnson Summary of Event In the early 1960’s, the U.S. economy was experiencing problems in many areas. These problems included recurring recessions, high rates of unemployment, excess productive capacity, inadequate profits, and lack of 429

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business investment. Because of the sluggishness of the economy, the federal budget ran a deficit, an unusual occurrence in peacetime. The country had experienced five recessions since the end of World War II. The annual economic growth rate was down to 3 percent, and unemployment was above 6 percent. For 1963, President John F. Kennedy originally projected a $500 million surplus, but as a result of the stagnating economy, a $9 billion deficit was projected by mid-year. Walter Heller, chairman of the Council of Economic Advisers, was a key proponent of a tax cut. He believed that the structure of high tax rates, which dated back to World War II, was acting as a brake on the economy. Whenever the economy went into an expansion, the high tax rates slowed it down. What Kennedy proposed was a tax bill that contained both a tax cut and tax reform. The original proposal was for a $13.6 billion reduction in taxes. Key reforms included an end to the dividend credit exclusion and changes in deductions for charitable contributions, home mortgage interest, and casualty losses. For corporations, he proposed both a reduction in rates and changes in the tax payment dates that in effect speeded up the receipt of corporate tax payments. The focus was on helping small business by reducing the corporate tax rate from 30 percent to 22 percent on the first $25,000 of corporate income. The surtax on earnings in excess of $25,000 would be 30 percent, later reduced to 28 percent. Capital gains tax rates would be reduced from 25 percent to 19.5 percent. The required holding period for an asset would change from six months to a year. Executives with restricted stock option plans would not be able to use capital gains rates. A big change was proposed in the treatment of real estate tax shelters. Investors had been using accelerated depreciation methods and then selling properties for a profit. Under the proposed change, part of the gain would be taxed as ordinary income rather than as capital gains, which were taxed at lower rates. This caused concern among Realtors, who argued that the tax advantage had been built into real estate prices and that an increase in taxes would deflate prices in the real estate market. Business was cool to the Kennedy Administration for two major reasons. After the Bay of Pigs invasion, the government paid ransom to Cuba to release American prisoners. Since government funds could not legally be used for ransom, corporate donations were solicited. Companies with large government contracts or with pending hearings were particularly hard hit for contributions. In addition, in the spring of 1962, Kennedy had pressured the steel industry to reduce its proposed price increases. Overall, businesspeople and workers were concerned about the power of government and how its use affected business in both positive and negative ways. There was not as much concern about the size of government, with 430

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business accepting the necessity of a large federal bureaucracy. In one example of a challenge to the government’s use of power, the administration was charged with pressuring aerospace firms and other large contractors to accept union shop clauses, which mandated union membership for company workers. The investment community favored the idea of the tax cut but was cautious about what might happen to the bill as it made its way through Congress. Wall Street liked the planned corporate tax reduction but was concerned about budget deficits and the potential for inflation. American business as a whole initially opposed the plan because of concern about the effect that financing the deficit would have on the credit markets and interest rates. The proposed tax cuts primarily benefited lower income groups. Business advocates argued that spending by the lower income groups would not be sufficient to stimulate the economy. Business liked the cut in corporate tax rates and the decrease in rates for the upper tax brackets but was concerned about the acceleration of corporate tax payments. The proposal also called for a reduction in the oil depletion allowance. In addition, foreign tax credits would be limited. Companies would be prohibited from using foreign development costs to offset U.S. taxable income. These changes would hit the oil and gas industries hard, and industry leaders predicted a substantial decrease in domestic drilling. The home building industry was concerned about the proposed reduction in the mortgage interest deduction, as were homeowners. The auto industry, on the other hand, favored the tax cut, seeing a potential increase in the number of two- and three-car homes as the tax cut would likely encourage car purchases. Federal Reserve Board chairman William C. Martin, Jr., clearly favored the tax cut and indicated that he would not let interest rates rise if the tax cut passed. Goals of the tax cut were to achieve economic growth of 4.5 percent per year and to bring unemployment down from 5.8 percent to 4 percent. By April, 1963, the unemployment rate was 6 percent. There was concern over the impending entrance of the baby boom generation into the workforce and the need for significant job expansion to meet that challenge. There was equal concern about the loss of jobs resulting from automation. The Council of Economic Advisers estimated that two million new jobs would be needed each year to offset jobs lost to automation. Walter Heller estimated that the tax cut would create two to three million new jobs. At first, Kennedy tried to boost the economy by increasing government spending, but concern over the resulting deficits caused him to turn instead to the use of the tax cut strategy. 431

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As the bill made its way through Congress, many of the tax reform items were dropped. Capital gains rates stayed at 25 percent. Individual marginal tax rates were cut from 91 percent to 70 percent for the highest tax brackets. Long-term capital gains rules would apply after only six months. A onetime tax exemption was offered for the sale of a personal residence. Stock options held for more than three years would still qualify for capital gains treatment. No change was made to the deductibility of mortgage interest. Changes were made to the deductibility of casualty losses, charitable contributions, and sick pay. There was a new increased standard deduction. At the time of President Kennedy’s assassination, the tax bill had not yet passed the Senate. President Lyndon B. Johnson supported the tax cut and was opposed to increased government spending as a way to stimulate the economy. Johnson was perceived to be more friendly to the business community. In the Senate, the Long Amendment extended the benefits of the investment credit and added leased equipment to the list of qualified investments. Real estate tax shelters held for less than ten years were taxed at a higher rate. In the final version of the bill, few of the original tax reform items remained. On February 26, 1964, President Johnson signed the Revenue Act of 1964. It had taken thirteen months for the bill to pass Congress. Impact of Event The Revenue Act of 1964 cut taxes by $11.6 billion, with individuals receiving $9.2 billion and corporations receiving $2.4 billion. There was a major reduction for people with annual incomes below $3,000; they would no longer pay taxes. Tax cuts for individuals slightly favored the higher income brackets. The 15 percent of taxpayers at the highest brackets benefited from a 40 percent reduction in their taxes. The remaining 85 percent of taxpayers received 60 percent of the benefit. In total, an estimated 90 percent of taxpayers received some benefit from the tax cut. The impact was felt immediately because of prompt changing of payroll withholding rates, which pumped an additional $800 million into the economy monthly. That additional money would prompt extra purchases and lead to a chain reaction of increased economic activity. It was expected that the Gross National Product would increase by $30 billion. The hope was that investment spending would increase as firms saw that investment was profitable because of the increased consumer spending. Concerns of business after the tax cut focused on inflation. Productivity was rising 2.6 percent per year in the nonfarm sector and 6.1 percent in the farm sector. Unions pushed for wage increases to match productivity increases. There was concern that increased costs would create an inflationary spiral. There was also concern about the nation’s balance of payments. The fear 432

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was that in order to alleviate the trade deficit (an excess of imports relative to exports), interest rates would be raised, and that the higher interest rates would dampen the effect of the tax cut within the U.S. economy. President Johnson was also concerned about the federal budget deficit, which could also result in higher interest rates. He cut spending—primarily in defense—in order to reduce the deficit. The budget request for the War on Poverty was modest because of the size of the deficit. Few people believed that the tax cut would reduce poverty rates measurably. The effects on business occurred over a longer period, through the accelerated corporate tax payment schedule. Prior to the bill’s passage, corporations estimated their taxes in September and paid half of that amount at year end. Corporations with tax liabilities in excess of $100,000 would have to pay earlier and eventually would pay in quarterly installments. The most immediate positive impact on business was increased inventory investment, as firms prepared for increased consumer spending. The other major direct benefit for business was the change in the investment credit. The anticipated benefit from that change was a $160 million reduction in corporate taxes in 1964 and $195 million in 1965. While the tax bill was making its way through Congress, the economy was well into a recovery. In 1963, steel production rose 11 percent over 1962. During the fourth quarter of 1963, 2.2 million new cars were produced, setting a record. Construction increased. Retail trade, business investment, and consumer spending all rose throughout 1963, before the tax cut was passed. The tax cut was hailed as a monument to the ideas of economist John Maynard Keynes and as a significant shift in economic policy. President Franklin D. Roosevelt had used fiscal policy favored by Keynes to pull the country out of the Depression, but he favored increased spending as a tool rather than tax policy. The belief in a balanced budget was commonly held, in opposition to Keynesian economics. The significance of the tax cut was in the use of tax rather than spending policy and the use of planned budget deficits. The Kennedy-Johnson tax cut was more closely aligned to Keynes’s theory than was the New Deal. By June, 1964, the economy had been growing for forty months, in the longest period of economic growth since World War II. Prices remained stable. The Federal Reserve Index of Industrial Production was up 25 percent from the base period of 1957-1958. Production costs were stable. The Census Bureau’s Index of Unit Labor Costs of Manufacturing showed that labor costs had actually fallen slightly from the same base period. According to the McGraw-Hill Capital Spending Survey, business planned a 14 percent increase in capacity over the next three years and expected a 433

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19 percent increase in sales volume. Stock prices held steady, and consumer spending grew, as did the level of consumer debt. In October, 1964, a major strike at General Motors idled 265,000 workers. The strike caused a reduction in auto production in the last quarter of 1964 and reduced projections for 1965. There was fear of a steel strike, and manufacturers began stockpiling steel in anticipation. A contract settlement at Chrysler exceeded the administration’s wage guidelines and fueled fears of inflation. Raw material prices rose. By August, there was a 7 percent drop in construction contracts and an increase in home mortgage foreclosures. There was growing concern about business failures and the increase in consumer debt. By 1965, the Gross National Product had increased 25.3 percent since 1961. Industrial production was up 27 percent. Personal income was 21.5 percent higher than in 1961, and corporate profits had risen 64 percent in the four-year period. The unemployment rate was still above 5 percent, and there remained concern over structural unemployment and poverty. Credit remained available because the Federal Reserve System increased the money supply as interest rates increased. The impact of the tax cut was felt both before and after the legislation was passed. The congressional debate increased consumer and business expectations. Passage of the legislation then secured a recovery that was already well under way. The importance of the tax cut has more to do with the essential change in government policy that occurred. For the first time, tax policy was used deliberately to manipulate the economy. The government’s role as economic manipulator was firmly accepted. The Keynesian concept of planned deficits took root. The ideal of a balanced budget remained, but the business community, voters, and Congress became willing to accept budget deficits as part of the economic picture. Bibliography Bernstein, Irving. “Keynesian Turn: The Tax Cut.” In Promises Kept. New York: Oxford University Press, 1991. A history of the Kennedy Administration, with detailed description of the political process involved in the tax cut legislation. Good discussion of the relationship between the administration and business at the time. Evans, Rowland, and Robert Novak. “Taming the Congress.” In Lyndon B. Johnson: The Exercise of Power. New York: New American Library, 1966. An interesting narrative description of how President Johnson maneuvered the tax bill through Congress. Shows Johnson’s struggle to come to terms with the new economics represented by the tax cut proposal. 434

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Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Solow, Robert M., and James Tobin. “The Kennedy Economic Reports.” In Two Revolutions in Economic Policy, edited by James Tobin and Murray Weidenbaum. Cambridge, Mass.: MIT Press, 1988. Compares economic policy changes that occurred during the Kennedy Administration and during the Reagan Administration. A highly readable explanation of economic issues of the time and reasons for the tax cut proposal. The text also includes the presidents’ economic reports for readers who want detailed statistics and data. Sorensen, Theodore C. “The Fight Against Recession.” In Kennedy. New York: Harper and Row, 1965. An insider’s view of the thinking and discussions within the Kennedy Administration that led to the tax cut proposal. The chapter provides detail regarding the economic problems of the time and why the tax cut proposal was considered to be the best option. “Tax Cut: Triumph of an Idea.” Business Week, April 11, 1964, 180-182. Excellent synopsis of economic thought. Contains anecdotes about Keynes’s thinking and shows the policy shift represented by the tax cut and its importance in the evaluation of economic theory. The style is informative and clear. A good background source for readers without training in economics. Alene Staley Cross-References The General Agreement on Tariffs and Trade Is Signed (1947); Firms Begin Replacing Skilled Laborers with Automatic Tools (1960’s); Reagan Promotes Supply-Side Economics (1981).

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THE CIVIL RIGHTS ACT PROHIBITS DISCRIMINATION IN EMPLOYMENT The CivilR ights Act Prohibits Discrimination in Employment

Category of event: Labor Time: July 2, 1964 Locale: Washington, D.C. Under Title VII of the Civil Rights Act, victims of employment discrimination were legally entitled to a process for resolving grievances Principal personages: Robert F. Kennedy (1925-1968), the U.S. attorney general, 1961-1964 Lyndon B. Johnson (1908-1973), the president of the United States, 1963-1969 Martin Luther King, Jr. (1929-1968), a civil rights leader and 1964 Nobel Peace Prize winner influential in drafting the bill Hubert H. Humphrey (1911-1978), the Senate floor manager of the bill Emanuel Celler (1888-1981), the chairman of the House Judiciary Committee when the bill was proposed William McCulloch (b. 1901), the senior Republican on the Judiciary Committee, instrumental in influencing undecided Republicans to vote in favor of the bill Peter Rodino (1909), the Democratic representative who proposed an amendment to establish the Equal Employment Opportunity Commission Everett Dirksen (1896-1969), a conservative Republican senator who reversed his opposition to the bill and cast a pivotal vote to end the Senate filibuster against it 436

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Summary of Event Title VII of the Civil Rights Act of 1964 prohibits discrimination in employment. It is one of the eleven major provisions of the act, which prohibits discrimination in all sectors of society. The significance of the act in general is that it was more comprehensive and contained more power for enforcement than any previous civil rights legislation. Title VII in particular is significant because it drastically changed employment practices in efforts to provide equal opportunity and provided for legal means of resolving the grievances of people who had suffered from employment discrimination in the past and might face it in the future. Prior to 1964, major legislation prohibiting discrimination in employment practices consisted of President Franklin D. Roosevelt’s 1941 executive order creating the Fair Employment Practices Committee (FEPC) to prevent job discrimination in war industries, President Harry S Truman’s order to desegregate the armed forces in 1948, and the Equal Pay Act of 1963, which prohibited sex discrimination, especially with respect to wages. In the opinion of civil rights advocates, none of these laws was comprehensive enough. The period between the mid-1950’s and the mid-1970’s was one of widespread social unrest in the United States. The Civil Rights Act of 1964 came about in part as a response to a series of demonstrations against racial discrimination that began in the mid-1950’s. Impatient with what they perceived to be slow progress in eliminating racial discrimination, African Americans and civil rights advocates of all races began to hold increasing numbers of protest demonstrations. Under the leadership of Baptist minister Martin Luther King Jr., and others, thousands of civil rights activists held a series of marches, sit-ins, and boycotts, mostly in the South. Although the civil rights demonstrations were generally nonviolent, opponents responded with arrests, attack dogs, and firearms. Because violent scenes, sometimes involving killing, were broadcast nightly on television, it was not long before the issue became national rather than merely regional. Regardless of where they stood on racial issues, most Americans were appalled at the treatment of demonstrators and the scenes of brutality they witnessed. Many feared a serious breakdown of social order and began to demand government action to put an end to the violence. U.S. Attorney General Robert F. Kennedy perceived a potential threat and declared that there was an immediate need for stronger and broader legislation to put an end to the racism and inequality at the root of the unrest. He urged his brother, President John F. Kennedy, not to delay in drafting and sending a civil rights bill to the House of Representatives. In June, 1963, the president sent an eight-provision bill to the House. It was far more 437

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detailed and powerful than any previous civil rights bill, but amendments by a bipartisan group of civil rights advocates in the House and Senate made it even stronger. In both houses, however, conservative Republicans and southern Democrats proved to be powerful adversaries of the bill. In the Senate, a thirteenweek filibuster, the longest in history, nearly killed the bill. When Senator Everett Dirksen, a powerful conservative Republican, reversed his opposition to the bill and cast a pivotal vote for cloture, the debate ended. On July 2, 1964, one year and thirteen days after the bill first entered the House, it was signed into law by President Lyndon B. Johnson. Like the other provisions of the law, Title VII in its final form is far more comprehensive than first proposed. It prohibits discrimination on the basis of race, color, religion, sex, and national origin in the hiring and classification of employees as well as in the granting of labor union membership. It is administered by the Equal Employment Opportunity Commission (EEOC), an agency with legal enforcement powers. The EEOC investigates charges of discriminatory practices, establishes procedures for resolving grievances through mediation, or failing mediation, refers cases to local or state authorities for resolution. If voluntary compliance is not secured sixty days after these procedures, the aggrieved parties may file suit in federal court. Jury trial can be requested by either plaintiff or defendant. The EEOC can also request the court to permit the U.S. attorney general to intervene

President Lyndon Johnson signs the Civil Rights Act of 1964 as government and civil rights leaders look up. (Library of Congress)

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in suits and can urge the attorney general to file suit whenever discriminatory employment practices are observed to exist. In cases in which local and state laws regarding discrimination are more strict than federal law and more inclusive of the groups deemed entitled to protection from discriminatory practices, the EEOC can advise the plaintiff to file charges locally before filing with the federal agency. Generally, plaintiffs are able to have allegations investigated on both the state and federal levels. Impact of Event The long and contentious debate involved in passing the Civil Rights Act of 1964 is reflected in the difficulties in interpreting, applying, and enforcing the law. The most important impact of Title VII is that it made employment practices more equitable than they were prior to 1964 but also more complex and more subject to government regulation. Charges of discrimination and decisions regarding charges can involve lengthy and expensive disputes, and differing interpretations of the law have sparked controversy. Under Title VII, substantiated charges of discrimination are backed by government agencies and the courts. Plaintiffs can receive compensatory damages for proven violations of Title VII, and when charges of past discrimination are proved, the damage settlement can be retroactive. In 1973, for example, American Telephone & Telegraph (AT&T), faced with a class action suit, paid $15 million in back wages to fifteen thousand women and minority-group men and an additional $23 million in raises to thirty-six thousand employees. The payments came as part of a settlement in which AT&T did not admit to having discriminated. This case was one of the most widely publicized, but there were many other cases against both large and small companies. Some went as far as the Supreme Court. Employment practices did not change rapidly enough to satisfy some protected groups and their advocates. EEOC investigations often concluded that female employees and employees of various racial and ethnic backgrounds were not being promoted or given raises on a parity with white male employees. In cases in which companies had few or no minorities on the payroll even though minority workers were available, the EEOC declared that discrimination existed. Companies were advised to take proactive measures by establishing goals and objectives to rectify past or current discrimination. These proactive measures, known as affirmative action, consisted of aggressive programs of recruitment of minorities, fair employment testing methods, and training programs to ensure appropriate placement of employees and equal opportunity for advancement. Lack of nondiscriminatory and consistent training could result in charges of discriminatory failure to promote. 439

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When employment testing came under the scrutiny of the EEOC, employers were required to prove that their tests were nondiscriminatory. Tests used to rank or evaluate applicants had to involve skills or abilities directly related to jobs. The EEOC believed that tests were often biased as to the sex, culture, or race of applicants and therefore could not be used as accurate assessments of skills or ability to perform jobs. Tests had to be validated as fitting job specifications and accurately assessing the skills of people of varying racial, cultural, and educational backgrounds. If the tests could not be validated as meeting these requirements, they were to be discarded. EEOC guidelines on testing were upheld by two Supreme Court decisions during the early the mid-1970’s, Griggs v. Duke Power Company (1971) and Albemarle Paper Company v. Moody (1975). Whether out of fear of reprisals or out of a sincere desire to provide a fair and balanced workforce, companies generally made good-faith efforts to comply with EEOC rules. It is important to note what is meant by “good-faith” efforts. They are accepted by the EEOC in lieu of desired results only when they can be proven to be the best that a company can do at a reasonable cost and in the light of any extenuating circumstances. Good intentions alone are not always a sufficient defense against charges of discrimination. If, for example, a company has a stated nondiscriminatory policy but has no workable affirmative action program to support it, charges of discrimination might hold up. The good-faith defense was rejected in Griggs v. Duke Power Company. On the other hand, good faith was accepted by a New York district court in Rios v. Enterprise Association Steamfitters Local 638 in 1975. Affirmative action programs worked in many companies, and more female and minority workers were entering the workforce. Although their salaries were still lower than those of white men and although positions in upper levels of management were still out of reach for most of them, salaries slowly approached parity, and women and minorities advanced into positions of rank and responsibility. Many civil rights advocates still considered the progress of affirmative action to be too slow, however, and the EEOC issued stricter guidelines. It decided that the percentages of minority workers in companies should reflect the composition of the surrounding community. When the EEOC concluded that the percentage of minority workers at a company did not reflect the numbers available for work, it concluded in most cases that discriminatory practices existed. Companies often were required to hire specified numbers of minority workers by specific dates. Opponents of this type of quota program charged that it constituted a preferential practice. They argued that recruiting and hiring for the purpose of attaining a mandated number or percentage of members of a protected 440

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group would result in a workforce composed of people employed by virtue of their sex or ethnicity rather than their skills. They argued further this was both an invitation to possible poor job performance and an insult to the group or individual the program was designed to protect, because it implied inferiority and suggested that their employment resulted only from the EEOC mandate. Opponents charged that such programs were in direct violation of Title VII, which states that nothing in the title should be interpreted as requiring an employer to grant preferential treatment to employees of any race, color, religion, sex, or national origin. Nevertheless, in 1986 the Supreme Court upheld affirmative action hiring quotas as a remedy for past discrimination. Such disputes illustrate the complexities of complying with, interpreting, and applying EEOC guidelines. Regardless of the controversies, however, the Civil Rights Act of 1964 has come closer to putting into practice the theory of equal opportunity embodied in the Fourteenth Amendment than had any prior civil rights legislation. The long-term impact of Title VII will be a continuous challenge to business to operate efficiently while at the same time providing fair treatment to workers, in compliance with the law and in the spirit of the Constitution. Bibliography Farley, Jennie. Affirmative Action and the Woman Worker. New York: AMACOM, a division of American Management Association, 1979. A guideline for personnel management. Discusses affirmative action in recruitment, selection, and training, analyzing what works and what does not. Glazer, Nathan. “From Equal Opportunity to Statistical Parity.” In Affirmative Discrimination: Ethnic Inequality and Public Policy. New York: Basic Books, 1975. Although conceding that there have been benefits from affirmative action, Glazer argues that quota systems can harm the very groups and individuals they were designed to protect. Tracing the history of progressively stricter government mandates in employment, he discusses what he views to be inherent weaknesses in the language and interpretation of legislated equal employment opportunity. A complex and interesting argument. Peres, Richard. Dealing with Employment Discrimination. New York: McGraw-Hill, 1978. A clearly written, objective discussion of civil rights legislation and how it can be applied to the best advantage of both employer and employee. The book defines unlawful discrimination and explains how complaints can be prevented or resolved. An extensive 441

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appendix contains reprints of Title VII and other pertinent equal employment opportunity legislation. Sowell, Thomas. Preferential Policies: An International Perspective. New York: William Morrow, 1990. Comparing American affirmative action with similar policies in other countries, the author discusses the results and implications of these policies on society in general. For readers interested in a broad discussion of the impacts of nondiscriminatory policies. Whalen, Charles, and Barbara Whalen. The Longest Debate: A Legislative History of the 1964 Civil Rights Act. Washington, D.C.: Seven Locks Press, 1985. Written in a lively style and meticulously documented, this book follows the progress of the act from its historical background to its enactment into law. Provides interesting insights into the legislative process. Wofford, Harris. “Popular Protest and Public Power: Civil Rights.” In Of Kennedys and Kings: Making Sense of the Sixties. New York: Farrar Straus Giroux, 1980. Narrates the events and discusses the personalities crucial to the passage of the 1964 Civil Rights Act. Christina Ashton Cross-References Congress Passes the Equal Pay Act (1963); The Supreme Court Orders the End of Discrimination in Hiring (1971); The Pregnancy Discrimination Act Extends Employment Rights (1978); The Supreme Court Rules on Affirmative Action Programs (1979); Firefighters v. Stotts Upholds Seniority Systems (1984); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986).

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AMERICAN AND MEXICAN COMPANIES FORM MAQUILADORAS American and Mexican Companies Form MAQ UILADORAS

Category of event: International business and commerce Time: 1965 Locale: Mexico and the United States In the mid-1960’s, the Mexican and American governments encouraged formation of a series of factories along their border to provide economic boosts to cities on both sides Principal personages: Luís Echeverría, (1922), the president of Mexico, 1970-1976 Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 Gustavo Díaz Ordaz (1911-1979), the president of Mexico, 19641970 Octaviano Campos Salas, the Mexican minister of industry and commerce in 1965 Summary of Event In 1965, Mexico’s minister of industry and commerce, Octaviano Campos Salas, proposed the establishment of a tariff-free zone along the United States-Mexico border. President Gustavo Díaz Ordaz wholeheartedly supported the idea. That marked the beginning of the maquiladoras program, officially known as the Border Industrialization Program, which may be considered the forerunner of NAFTA, the North American Free Trade Agreement, which Canada, Mexico, and the United States signed in 1992. From the Mexican standpoint, the maquiladoras, or factories, were designed to benefit the entire country. Although they were located primarily 443

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in border areas, the intent was to open free trade zones in parts of Mexico that needed economic stimulation. The government envisioned that the spread of benefits from the areas would have a positive effect on the country as a whole. In fact, it hoped that the program would lead to the establishment of a de facto Mexican-United States free trade area all along the border. The maquiladoras did provide an economic boost to cities on both sides of the border, but they brought problems as well. The maquiladoras were seen as labor-intensive businesses that would create sorely needed jobs in Mexico and keep American industries competitive in a global economy by lowering labor costs. They began as joint ventures between a variety of Mexican and American companies. A few Mexican companies established operations, and several plants formed around Mexican labor cooperatives. The bulk of the maquiladoras, however, were subsidiaries of American companies. The Mexican government developed its program to allow manufacturers to use low-cost labor to assemble final products for re-export. The procedure was simple: Mexican manufacturers would import components and raw resources from the United States duty free. They would transform these materials into finished products and ship them back to the United States. Often, the shipping consisted of short trips across the border, since many of the American companies built component manufacturing “twin” plants on their side of the dividing line between the two countries. The only duty paid was on the added value (principally the cost of labor) of the goods. There were other benefits as well. For example, American companies could, through thirty-year trusts created by Mexican credit institutions, gain control over their factories and office facilities through leases, or, in some cases, outright ownership. Without the trusts, they could have no control, since Mexican law prohibited foreign companies from owning any land in areas within sixty miles of the American border or thirty miles of the coast. As the program grew, the Mexican government relaxed some of its limitations on American companies. For example, it eased its ban on American companies selling any of the finished goods in Mexico. Once that happened, the companies were allowed to sell up to 20 percent of their production within Mexico. Such benefits, combined with cheap labor, were magnets for American companies looking to cut production costs. The government also removed its restriction prohibiting United States companies from buying components in Mexico. This worked to the Mexicans’ advantage, as by 1987, American companies had purchased nearly $300 million worth of local parts. The revisions strengthened a growing program and led to even more jobs in the border cities on both sides. El Paso, Texas, for example, benefited tremendously. As the number of 444

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“twin plants” grew, so did El Paso’s dependence on maquiladoras. Within twenty years of the program’s inception, about 20 percent of jobs in the city were connected to maquiladoras. Mexicans near the border often spent their wages in American cities. In 1982, Mexicans bought an estimated 80 percent of the goods sold in Laredo, Texas, and spent about $200 million in San Diego, California. These figures indicate that both countries profited extensively from the maquiladoras program, which was nothing more than an extension of similar programs between Mexico and the United States. The phenomenon of Mexicans working for American companies was not new. During the nineteenth century, Mexican peasants moved into border communities seeking employment. Many entered the United States looking for jobs with the expanding railroads, and business operators in northern Mexico tried to enter American markets. Subsequently, cattle ranching grew and became more modernized in the American Southwest and northern Mexico. World War II increased cooperation between the United States and Mexico. The two governments negotiated the bracero program in 1942. American President Franklin D. Roosevelt and his Mexican counterpart, Manuel Avila Camacho, agreed to allow Mexicans to serve as agricultural workers in the American West. The United States needed these braceros to replace farm workers serving in its armed forces. Later, the Mexican workers spread into the American railroad industry. By July, 1945, there were an estimated fifty-eight thousand Mexicans working in the agricultural industry and another sixty-two thousand working for the railroads. There were also thousands of illegal immigrants working in various American industries. In addition to the agricultural and railroad workers, thousands of other Mexican laborers rushed north to work in new defense plants all along the border, from El Paso to San Diego. Consequently, Mexican border cities such as Tijuana and Ciudad Juarez started growing considerably. This presented problems for the Mexican government, in that it all but created two Mexicos. The area along the United States border became known as Mexamerica. For a long while after the war, the Mexican government concentrated on building up Mexamerica. Specifically, the government increased its investment in agriculture throughout Mexico, 75 percent of the funds going for irrigation projects. Most of the money was invested in the northern part of the country. The project turned a desert wasteland into a fertile, productive agricultural region. Many large modern farms emerged, similar to those on the American side of the border. The Mexican farmers grew crops including garbanzos, winter vegetables (especially tomatoes), cotton, citrus crops, 445

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grapes, and strawberries, most of which were destined for markets in the United States. Railroads expanded to connect the Mexican and American farming regions. The effect was an imaginary, but all too real, dividing line between northern and southern Mexico. In 1964, the American government ended the bracero program. President Lyndon B. Johnson, however, did not want to abandon Mexico. Both governments acted independently to offset the loss of jobs in Mexico. The United States government encouraged American businesses to invest in Mexico and re-export to the United States. It pointed out to American companies that under U.S. tariff codes, they could export items “offshore” for processing or assembly, paying duty only on the value added when they sent the goods back to the United States. This idea appealed to many American manufacturers. A year later, the Mexican government modified its foreign investment laws to allow American firms to establish plants in Mexico. The primary goal was to provide jobs in northern Mexico for returning braceros and others. Just how well it succeeded is evidenced by the fact that in the early stages of the program, 89 percent of the maquiladoras were located along the Mexico-United States border. The government also hoped to create a foundation for an industrial base. It succeeded in both aims, even though success did not always come easily. In 1969, President Richard M. Nixon virtually closed the U.S.-Mexico border during a controversy over drugs. Then, in August, 1971, he unexpectedly imposed a 10 percent duty on imports that severely affected Mexico, which sold more than 70 percent of its exports to the United States. Mexican President Luís Echeverría, a staunch supporter of the maquiladoras program, continued to push for better relations between the two countries. His diplomacy prevailed, and the program grew. Impact of Event The maquiladoras program attracted the hoped-for investment and foreign exchange earnings. Significantly, the maquiladoras became Mexico’s second-largest source of foreign earnings, behind oil and ahead of tourism and migrant workers. In the first twenty years of their existence, the number of maquiladoras grew to almost one thousand. By 1987, American firms had invested approximately $2 billion in their “offshore” operations in Mexico. Those figures satisfied the Mexican government’s foreign investment goals. There was similar success in the employment picture. The maquiladoras program created jobs. Ironically, at its outset, young, single women filled as many as 78 percent of them. These were women who, for the most part, were born and reared in the borderlands. Without 446

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the maquiladoras, they probably would have been unemployed. This created a disruption in Mexico’s social structure. Traditionally, Mexican women stayed home, and men worked outside the home. Many of the men who might have worked in the maquiladoras, however, had remained in the United States as the bracero program wound down. Those who returned did not want to work for the low wages offered in the border plants. Women therefore became the primary source of workers for the maquiladoras. The government had to find a way to change this situation. Gradually, through a series of incentives, the percentage of male workers increased. By 1985, it was up to 23 percent. A year later, the figure reached 32.9 percent. There was also a turnover problem in the border cities. As the popularity of the maquiladoras program soared, so did the number of people moving from rural areas of Mexico to find work in the border towns. Many of them worked only a short while before moving into the United States for betterpaying jobs. The Mexican government sought ways to keep its citizens at home. American companies helped by investing in training and motivation programs and by assisting higher education in the Mexican border states. Within a few years, Chihuahua had five technological schools, the most in the nation; Tamaulipas had four. These moves helped curb the outflow of workers to the United States. The Mexican government had other problems to deal with, though, such as the environment. In the mid-1970’s, approximately 450 maquiladoras plants employed about 70,000 workers. By 1987, the maquiladoras employed 310,000 Mexicans, and experts began predicting that the number would reach 1 million by 1995 and that U.S. imports of their products would reach $25 billion annually. The successes of the program, however, came at a price. The maquiladoras attracted opposition both in Mexico and in the United States. Organized labor in the United States complained that the program took jobs away from Americans. Some Mexicans criticized the program because it exploited the nation’s workers and did little to improve technology, train workers for better jobs, or increase wages. It is important to note that 83.1 percent of the maquiladoras jobs were considered technical. Worse, the critics said, the maquiladoras were strangling the Mexican border cities. The Mexican government argued that the program provided Mexicans with a chance to escape the poverty so prevalent in the interior of the country. The buildings in which they worked contained amenities such as air conditioning and lighting that improved employment conditions and made the employees’ lives easier. Regardless of the arguments pro and con, people flocked to the border cities to seek work, inadvertently creating problems. 447

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The large number of workers moving into Tijuana, Ciudad Juarez, and other large border cities overtaxed the communities’ facilities. They put a strain on electrical power, telephone lines, public transportation, housing, and border bridges. Crime increased, and health problems and water restriction caused difficulties for administrators. There was also concern over the mental state of workers who put in long hours doing repetitive tasks for low wages. Finally, there was an increase in the pollution generated by the growing number of plants. The Mexican government took steps to alleviate as many of the problems as it could. One step was to establish industrial parks to concentrate the businesses as much as possible and to meet their infrastructure needs. The parks were located near ports, with easy access to labor and raw materials. They provided administrative services for individual companies, including payroll administration and plant maintenance. The administrators even handled customs requirements and provided feasibility studies for American companies interested in establishing plants in Mexico. Another step was to spread out the maquiladoras. The Mexican government encouraged companies to relocate their plants or to build new ones in locations away from the most common bases of operations. Maquiladoras tended to concentrate in three cities in the early stages of the program, Tijuana, Mexicali, and Ciudad Juarez. As late as 1983, more than half of the plants were still concentrated in these three cities. The Mexican government continued to adapt the maquiladoras program, which admittedly got off to a slow start. In 1966, for example, the dutiable value of maquiladoras shipments to the United States was only $3 million. Ten years later, it rose to $536 million. By 1979, it exceeded the $1 billion barrier. Significantly, in 1976, maquiladoras exports equaled more than half of Mexican exports to the United States of manufactured goods, excluding chemicals and some food, oil, and fiber products. About twothirds of the exports consisted of items such as electronic and television parts, telephone switchboards, bicycles, textiles, and transportation and communication equipment. Over the years, the variety of goods produced by the maquiladoras increased. In retrospect, the program has been beneficial to both countries in most respects. The program suffered through normal growing pains in the 1960’s and grew erratically. In 1975, in Mexico, for example, the maquiladoras industry employed 67,000 workers. The following year, the government devalued the peso, which stimulated the program. By 1981, six hundred plants in Mexico provided 132,000 jobs. The government again devalued the national currency. Subsequently, by mid-1987, more than a thousand plants employed more than 279,000 people and generated $1.5 billion in 448

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earnings. One estimate suggested that maquiladoras could employ as many as three million workers by the year 2000. Such numbers justified the two governments’ vision in implementing the program in the 1960’s. The United States also benefited from the program. American companies were able to match labor-intensive, high-technology industries with reasonably priced skilled and unskilled laborers, maintaining their competitive edge in the process. The United States government did face problems from critics regarding the loss of jobs to Mexicans and the one-sided benefits the Mexicans were seen to be gaining from the lack of tariffs on re-exported products. Those were the same arguments the U.S. government faced in 1965, at the onset of the program. Trial and error resulted in a much larger program than the Mexican government planned on at the program’s inception. Even though the original design dictated that all products assembled were to be re-exported to the United States, the government expanded the program to include some European and Japanese companies. These companies also have established operations on the border. Bibliography McBride, Robert H., ed. Mexico and the United States. Englewood Cliffs, N.J.: Prentice-Hall, 1981. This collection of essays includes a particularly informative essay by Laura R. Randall, titled “Mexican Development and Its Effects upon United States Trade,” that presents meaningful statistics regarding the maquiladoras program. Pastor, Robert A., and Jorge G. Castaneda. Limits to Friendship: The United States and Mexico. New York: Alfred A. Knopf, 1988. A uniquely formatted book in which the two authors present contrasting views in a series of essays devoted to a variety of topics affecting U.S.-Mexican relationships. Raat, W. Dirk. Mexico and the United States: Ambivalent Vistas. Athens: University of Georgia Press, 1992. An easy-to-read book focusing on the manner in which the United States and Mexico have affected each other’s history, including the impact maquiladoras have had on the border regions. Riding, Alan. Distant Neighbors: A Portrait of the Mexicans. New York: Alfred A. Knopf, 1985. A concise overview describing Mexico’s political and governmental structures and economic and social conditions from 1970 to 1985. Roett, Riordan, ed. Mexico and the United States. Boulder, Colo.: Westview Press, 1988. A readable collection of essays that focuses on the economic agenda and key bilateral issues affecting U.S.-Mexican relationships. 449

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Schmitt, Karl M. Mexico and the United States, 1821-1973: Conflict and Coexistence. New York: John Wiley & Sons, 1974. A highly readable treatise on the often stormy relationship between the two countries, with an excellent summary of the inception of the maquiladoras program. Vazquez, Josefina Zoraida, and Lorenzo Meyer. The United States and Mexico. Chicago: University of Chicago Press, 1985. A concise history of U.S.-Mexican relations presented in two parts. Vazquez writes the history between 1821 and 1898, and Meyer picks up the story there. Includes discussions of ties among the United States, Mexico, and other Central and South American countries. Arthur G. Sharp Cross-References The United States Begins the Bracero Program (1942); The Agency for International Development Is Established (1961); The United States Suffers Its First Trade Deficit Since 1888 (1971); The Immigration Reform and Control Act Is Signed into Law (1986); Mexico Renegotiates Debt to U.S. Banks (1989); The North American Free Trade Agreement Goes into Effect (1994).

450

JOHNSON SIGNS THE MEDICARE AND MEDICAID AMENDMENTS Johnson Signs the Medicare and Medicaid Amendments

Category of event: Government and business Time: July 30, 1965 Locale: Independence, Missouri The passage of the Medicare and Medicaid amendments to the Social Security Act further opened medical care to the elderly and the indigent Principal personages: Clinton P. Anderson (1895-1975), the Democratic senator from New Mexico who cosponsored the Medicare bill Robert Kerr (1896-1963), the Democratic senator from Oklahoma who sponsored efforts to cover costs of medical care for the “medically needy” Cecil R. King (1898-1974), the Democratic congressman from California who cosponsored the Medicare Bill Wilbur Mills (1909-1992), the chairman of the House Ways and Means Committee Summary of Event The notion of governmental funding for the medical needs of United States citizens was not new in the 1960’s. The road to Medicare and Medicaid began during the Depression, when President Franklin D. Roosevelt’s New Deal Administration set up programs to help those unable to provide for themselves. The Great Society administration of Lyndon B. Johnson finally saw passage of governmental medical insurance for the elderly and poor. 451

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Private medical insurance had been available to consumers since the 1930’s, when the nonprofit Blue Cross and Blue Shield programs began. During World War II, the War Stabilization Board exempted “fringe benefits,” including health care and insurance, from its ban on wage increases. This gave employers an opportunity to place more value on their employees’ work without violating the ban on pay increases and resulted in a dramatic increase in the number of Americans covered by medical insurance. Coverage, however, was largely limited to those in an employer or union plan and left the retired elderly and unemployed without coverage. Postwar medical advances made health care more expensive. Advances in technology made for medical miracles but came at a cost. In 1945, President Harry S Truman recognized the financial burden of medical care on the elderly and called for the American Medical Association (AMA) and other groups to look into funding alternatives. The 1950’s brought more attention to the medical needs of the poor and elderly, as health care costs more than doubled during the decade. A program sponsored by Senator Robert Kerr (D-Oklahoma) and Congressman Wilbur Mills (D-Arkansas) that set up federal-state sharing of medical expenses for the “medically needy” helped lessen the cost burden. The program set up a vendor payments system whereby state agencies made direct payments to physicians and other medical providers. Aime Forand (R-Rhode Island) proposed a plan in 1959 that would provide hospitalization coverage for Social Security recipients and be funded through an additional Social Security tax. By 1960, more than 17.5 million Americans had reached the age of sixty-five, and the proportion of elderly Americans was growing. Improved technologies had resulted in better medical care, which in turn meant longer lives. Studies showed that 15 percent of the average elderly person’s income was spent on medical care, and concerns arose that this income (in most cases fixed) could not keep in step with rising medical costs. That same year, Health, Education, and Welfare Secretary Arthur Flemming proposed plans for medical insurance, using the term “medicare” for the first time. A year later, congressmen Cecil King and Clinton Anderson introduced an official proposal for a medicare plan. This program was similar to the Forand legislation but added an annual deductible and coverage of retirees from the railroads. Opposition to this proposal came from an unexpected source, the AMA. The organization lobbied heavily against governmental involvement in the medical industry, fearing a loss of control over patient care. Doctors’ groups publicly stated their intention not to treat patients under the program and spread fears within the American public of socialized medicine. The 452

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AMA’s alternative solution was a program called “Eldercare,” introduced in the House of Representatives by some Republican members. This stateadministered private health insurance plan would be funded by a premium based on the purchaser’s income, with federal subsidies for the needy. The plan soon died, after Republican Party leadership did not lend support. Committee hearings reached gridlock on the issue. The King-Anderson proposal was tabled so that Congress could concentrate on tax and civil rights legislation during 1963 and 1964. The 1964 election reopened the door for health insurance. President Lyndon Johnson called for immediate attention to the issue of medical care for the elderly and the poor. In addition, the election put Democratic majorities into both the Senate and the House of Representatives. The AMA realized that some type of insurance plan was coming, and in 1965, James Appel, the president of the AMA, called for a compromise and encouraged doctors to participate in shaping new regulations governing health care. The Eighty-ninth Congress passed the Medicare and Medicaid bills in 1965 as amendments to the Social Security Act. Signed by President Johnson at the Harry S Truman Library in Independence, Missouri, on July 30, 1965, the new programs went into effect on July 1, 1966. The first Medicare cards were given to former president Harry S Truman and his wife. Administered by the Department of Health, Education, and Welfare (HEW) and the Social Security Administration, Title XVIII of the Social Security Act (Health Insurance for the Aged), or Medicare, was divided into two programs. Part A, hospitalization, was an automatic program for those aged sixty-five and over and eligible for Social Security or railroad retirement benefits. People under the age of sixty-five could receive Medicare if they had been receiving Social Security for more two years as a result of a disability. The program was funded through a percentage of the Social Security taxes paid by all workers. It provided for sixty days of hospital care with a $40 deductible to be paid by the patient and an additional thirty days of coverage at a cost to the patient of $10 per day. Other provisions included one hundred days of nursing home care for treatment of certain medical conditions, with a $5 charge for each day after the first twenty, and up to one hundred home health-care visits after a hospitalization. The program did not cover long-term nursing home costs. Payments to medical providers were based on “usual, customary, and reasonable” charges. The second program, Part B, had been an add-on amendment to the King-Anderson proposal in 1965. It offered medical benefits based on a voluntary enrollment; more than 90 percent of those eligible enrolled the program. Enrollees in the program had a monthly premium deducted from 453

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their Social Security payments ($3 per month in early years) which was then matched by the federal government from the general treasury. Once an annual $50 deductible was met, the plan paid for 80 percent of physicians’ fees and supplies and an additional one hundred home nursing visits beyond those covered under Part A. A second amendment, Title XIX, Grants to States for Medical Assistance Programs, set up Medicaid. Medicaid was a cooperative program with responsibility shared by state and federal governments. Consolidating the Kerr-Mills programs to include the poor regardless of age, Medicaid increased annual federal grants to the states and called for additional medical care and screening for children in impoverished families. The program required states to cover all persons receiving cash assistance, although criteria for assistance and funding levels were to be determined on a stateby-state basis. Generally, those receiving Aid to Families with Dependent Children (AFDC) or public assistance were eligible. Medicaid also set limits on the amounts to be paid for various services. In 1966, California became the first state to establish a program, called Medi-Cal. New York followed in the same year. By 1968, forty-eight states had started Medicaid programs. Impact of Event Both critics and proponents of the medical care programs hoped for better health care for elderly and poor Americans as a result of the passage of Medicare and Medicaid. Whether that goal was achieved depends on one’s perspective. The almost 19.5 million elderly people who enrolled in the program during 1968 alone received more care, but that care came at an additional cost. Costs for prescription drugs and medical appliances such as walkers and braces, in addition to deductibles, kept medical costs at 15 percent or more of an elderly person’s income. Medicaid recipients, especially children, received basic health care, but millions of small children still went without immunizations. Despite these problems, Medicare and Medicaid helped to encourage patients to play more active roles in their own health care. Patients began to question doctors about their options concerning treatment and providers. Patients and their families became a powerful consumer base as the medical industry became more of a business, with hospitals advertising to compete for patients in the early 1980’s. The Medicare and Medicaid programs underwent several revisions and amendments. Early changes brought about an extension in hospitalization from 90 to 120 days (1967) and gave certain patients with chronic kidney disease Medicare coverage (1972). Early Medicaid changes involved restrictions on funding and placed payments on a scale based on the Consumer Price Index (1970). 454

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As costs increased, the federal government sought to control payments. In 1972, limits were placed on “reasonable costs,” but it was not until the 1980’s that major changes were made in the Medicare program. Beginning in 1983, Congress implemented the concept of Diagnosis Related Groups. This revision sought to level discrepancies between geographical areas by setting flat-fee payments for certain medical conditions instead of paying a percentage of fees and costs. Six years later, in 1989, Congress further limited funds paid by Medicare when it decreased payments to specialists by 11 percent while increasing payments to primary care physicians by 20 percent, effective in 1992. In addition, a Resource-Based Relative Value Scale was implemented in an attempt to balance unequal charges. The same year, a cap was placed on Medicare patient charges. For 1992, doctors could charge 20 percent more than Medicare covered; for 1993, the figure was 15 percent. Despite numerous revisions and amendments, the Medicare and Medicaid programs retained several loopholes and gaps that raised costs either to the government or to consumers. Medicare did not cover long-term nursing home care or prescription drugs unless they were given in a hospital. The Medicaid program covered long-term care but only once a patient was eligible for the program. This meant that elderly persons virtually were forced to deplete their life savings to qualify for Medicaidcovered nursing home care. Several books and lecture series appeared to help elderly persons and their families learn to “hide” assets in order to keep them from going toward medical costs. Another alternative was the growing popularity of home health agencies, which Medicare did cover. These agencies provided home nurse visits for those still able to care for themselves at a basic level. To help combat the shortcomings of Medicare, private insurance companies developed supplemental policies. These “Medigap” plans helped with costs of prescription drugs as well as deductibles and charges above what was covered by Medicare. For example, a doctor visit might cost $40, even though Medicare set the prevailing charge for the area at $35. Once the deductible was met, Medicare would then pay 80 percent of the prevailing charge, or $28. If the doctor did not accept assignment (Medicare payment accepted as payment in full), the patient would then be responsible for the remaining $12. Supplemental policies often paid 80 percent of the remaining balance. Congressional investigations into Medicare problems resulted in the Medicare Catastrophic Coverage Act of 1988, which attempted to close the gap between actual and covered costs through expanding benefits. The program increased coverage of hospital benefits, added coverage for pre455

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scription drugs, and put a limit on out-of-pocket expenses. The plan was designed to be financed by an increased premium and a surtax on the incomes of wealthier Social Security recipients. Complaints flooded into Washington that the elderly, whom the act meant to help, were actually hurt by increased costs. Public opposition became so strong that the act was repealed in 1989. Medicaid was not without its own problems. To be eligible, a person had to be receiving cash assistance. In most states, these programs left out men and women without children. Most recipients of aid under Medicaid were children, and a high proportion of expenditures went for nursing home care for the elderly. Medicaid also placed a tremendous burden on states’ budgets, with a 583 percent increase in spending in the first ten years of the program. The state programs sought to decrease this burden through spending limits on a variety of medical areas, including drugs and physicians’ fees. New payment limits often fell so far below the prevailing charges in an area that some doctors refused to participate in the program, resulting in a reduction of primary care physicians. Those who did participate under the Medicaid and Medicare programs often found themselves forced to increase charges to other patients to make up for the low payments from those covered by Medicare and Medicaid, creating a cycle of increased costs. The rising costs of medical care fueled a constant debate over funding. States found themselves overburdened by the costs of Medicaid programs, and both Medicaid and Medicare placed ever-increasing strains on federal funds. Five years into the programs, expenditures on Medicare had increased by 300 percent and those on Medicaid by 400 percent. By 1975, annual U.S. medical costs had reached $133 billion; by 1984, a billion dollars a day were spent on health care. By 1993, medical care costs were more than $700 billion a year and represented more than 12 percent of federal spending. Administrative costs were often blamed for the rising costs, but a study conducted during the 1980’s estimated administrative costs for Medicare and Medicaid at 3 to 5 percent of total costs, while private insurance plans had administrative costs ranging from 14 to 24 percent of the total bill. One administrative area that did promote problems was billing, in particular overcharging by hospitals and doctors. Numerous doctors and hospitals faced fraud charges for padding the bills of patients in order to make up the difference between program payments and actual costs or to make up for those patients who could not pay. The spread of acquired immune deficiency syndrome (AIDS) also resulted in funding problems, as the high costs of treating patients fell heavily 456

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on the Medicaid program. How these already overburdened programs could face the growing medical epidemic was unclear. Alternative ways of funding Medicaid were needed to help keep the program alive. Funding the Medicare and Medicaid programs had been a struggle since their passage. The initial plans for funding proved unable to keep up with growing costs. More Americans were reaching the eligibility age for Medicare, and economic problems resulted in dramatic increases in the number of people receiving state assistance and Medicaid. Even so, many Americans were left with no medical coverage. The programs had opened medical coverage to more Americans and transformed the medical profession, but to remain effective they needed to keep pace with rising medical costs by finding new sources of funding. Bibliography Budish, Armond D. Avoiding the Medicaid Trap: How to Beat the Catastrophic Costs of Nursing Home Care. Rev. ed. New York: Henry Holt, 1989. Suggests numerous solutions to the problem of protecting the assets and life savings of elderly persons. Contains charts covering the guidelines and provisions for each state. Enthoven, Alain C. Health Plan: The Only Practical Solution to the Soaring Cost of Medical Care. Reading, Mass.: Addison-Wesley, 1980. Discusses the medical coverage options available to the American public, including private and publicly funded plans. Focuses on costs to the programs and consumers. Contains an author-developed Consumer Choice Health Plan to give consumers more control over health coverage. Feingold, Eugene, ed. Medicare: Policy and Politics. San Francisco: Chandler, 1966. A detailed look at the history and passage of Medicare. Covers changes made as a result of congressional debates and reprints several testimonies and excerpts from speeches by members of Congress and the AMA. Grannemann, Thomas W., and Mark V. Pauly. Controlling Medicaid Costs: Federalism, Competition, and Choice. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1983. Discusses means to control the growing costs and inadequacies of the Medicaid programs. Outlines suggestions to provide more medical care at lower cost. Witkin, Erwin. The Impact of Medicare. Springfield, Ill.: Charles C Thomas, 1971. Discusses the relationships between the Medicare program and hospitals, doctors, consumers, and insurance companies. Provides an early look at the program while recognizing its pitfalls. Appendices include the text of the law and a 1969 handbook. Jennifer Davis 457

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Cross-References The Social Security Act Provides Benefits for Workers (1935); The First Homeowner’s Insurance Policies Are Offered (1950); Health Consciousness Creates Huge New Markets (1970’s); Nixon Signs the Occupational Safety and Health Act (1970); The Employee Retirement Income Security Act of 1974 Is Passed (1974).

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CONGRESS LIMITS THE USE OF BILLBOARDS Congress Limits the Use of Billboards

Category of event: Advertising Time: August, 1965 Locale: Washington, D.C. The 1965 Highway Beautification Act banned billboards within 660 feet of interstate or primary highways except in industrial or commercial areas Principal personages: Lyndon B. Johnson (1908-1973), the president of the United States, 1963-1969 Lady Bird Johnson (1912), the first lady of the United States, 1963-1969 Phillip Tocker (1910), the chairman of the Outdoor Advertising Association of America when the law was passed Laurance Spelman Rockefeller (1910), an assistant to Lady Bird Johnson and a supporter of natural beauty Mrs. Cyril Fox, the chair of the Pennsylvania Roadside Council John Thomas Connor (1914), the secretary of commerce Summary of Event In August of 1965, the Highway Beautification Act was passed into law, largely as a result of the persistence of President Lyndon B. Johnson, Lady Bird Johnson, and Laurance Spelman Rockefeller. Phillip Tocker, chairman of the Outdoor Advertising Association of America (OAAA), supported the bill as long as commercial and industrial zones were exempt and if people who were no longer allowed to rent land for billboards were compensated. The act stated that all signs within 660 feet of interstate and primary highways were banned, except for official direction signs and on-premise 459

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advertising. Commercial and industrial areas were exempt. States that did not enforce removal of all offending signs by 1970 could lose up to 20 percent of their federal highway funds. Before the Highway Beautification Act of 1965 was passed, there was only one federal law specifically concerning billboards. It was passed in 1958 and stated that a bonus would be given to any state that controlled billboards within 660 feet of the federal interstate highway system. Only seven states qualified for bonuses: Kentucky, New York, Maine, New Hampshire, Ohio, Wisconsin, and Virginia. The billboard industry had grown so rapidly that in most cities there were more billboards than it was possible for a driver, or perhaps even a passenger, to read. The movement against billboards started in citizens’ roadside councils and garden clubs throughout the United States. These groups disliked billboards for two reasons. First, they thought billboards were ugly and blocked out landscape. Second, there were numerous reports linking increased numbers of accidents to prevalence of billboards. Some studies showed that there were three times as many accidents in areas with billboards as compared to similar areas without billboards. Billboard opponents reasoned that drivers were distracted by the advertisements. A growing interest in removing billboards initiated the Highway Beautification Act. In May of 1965, President Johnson held a conference at the White House to discuss the bill. Mrs. Cyril Fox, chair of the Pennsylvania Roadside Council and a representative of various roadside councils and garden clubs, attended this meeting. The bill that she and most beautification activists wanted to pass prohibited billboards within one thousand feet of interstate and primary highways, with no exempt areas. Her version of the bill also addressed other areas, including junkyards, landscaped areas, and scenic roads. New junkyards would be prohibited within one thousand feet of interstate and primary highways, and existing junkyards would either be removed or be screened by a fence of shrubbery within five years. States were to use 3 percent of their federal highway aid for landscaping and beautifying roadsides. States also would have to use one-third of their federal highway aid for secondary roads and access roads to recreational and scenic areas. Phillip Tocker was invited to this May conference. His suggestions outraged the beautification activists. He would support the bill only if the distance restriction were changed to 660 feet, commercial and industrial areas were exempt, and the federal government would compensate for losses. Mrs. Cyril Fox, the roadside councils, and the garden clubs were displeased not only with Tocker but also with Laurance Rockefeller and his 460

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staff. The roadside councils and the garden clubs believed that since they had been fighting for years against billboards, they should have a more powerful position, the one that Rockefeller and his staff were fulfilling. At the end of the conference, Tocker’s version of the bill was read to President Johnson. Fox, the roadside councils, and the garden clubs were disillusioned. After that conference, they no longer supported the bill, which they thought did not solve the problem. This lack of support made it difficult to pass the bill. President Johnson’s advisers were convinced that the bill had no chance of passing unless it exempted commercial and industrial areas, largely because of the influence of the OAAA. The OAAA was a strong organization with six hundred companies throughout the nation as members. They accounted for nearly 90 percent of all standardized outdoor advertising. Even after the compromises made at the White House conference in May the bill was held up in Congress. Some supporters thought that it would be best to wait until 1966 and try to get a stronger bill passed. In August, President Johnson sent out an urgent message that he wanted the bill passed that year. The bill that eventually passed had even more compromises than the one read to President Johnson in May. The Treasury Department was to compensate billboard owners and farmers who had rented out their land for billboards if their business was affected by the new law. The federal government would pay three-fourths the cost of the bill, with states paying the remaining one-fourth. Junkyards were exempt from screening or removal in commercial and industrial areas. The bill also authorized the use of federal funds for landscaping roadsides and for building scenic and recreational areas. These funds could be used for landscaping in right-ofway areas, work that states were supposed to be doing. The areas of commercial and industrial exemptions would be determined by the states, with the approval of the secretary of commerce. Secretary of Commerce John Connor assured Congress that a state’s decision would rarely be overturned. Although the bill that was passed was not nearly as strong as the original proposal, its passage proved difficult. Even though 83 percent of existing billboards were located in exempt areas and more could be added in those areas, the loss of even 15 percent of a $200 million a year industry caused opposition to the bill. Impact of Event The OAAA thought that it had preserved the heart of its business through the compromises in the bill. Only 15 percent of its business would be cut, 461

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and the cuts would not take their full effect for five years. Losses would be compensated by the government. In addition, advertisers could put up larger signs beyond the restricted 660 feet, thus reaching essentially the same audience, and they could put up more signs on exempt roads. Even with these opportunities, billboard use steadily declined after 1965. There are several reasons for the decline in billboard advertising. First, billboard advertising was not as effective as most other advertising media, particularly television advertising. Second, many cities were inundated with billboards. Many people became immune to them and stopped reading them. Some cities also enforced sign laws that were more strict than the federal law. Finally, beautification activists encouraged boycotts on products and services advertised on billboards. This did not make an enormous difference, but it had some effect. The lure of billboard advertising was that the advertiser paid one fee and then had an advertisement in place for an extended period of time, usually months. With most other advertising media, the advertising lasted for only a short time. Many advertisers discovered, however, other media produced more sales per dollar spent on advertising. Billboards did not have much text, since drivers and passengers were not able to read much in the limited time that a billboard was in view. This was a major reason for the lack of success from billboard advertising. All other advertising media, except newspaper advertisements, reported increases in 1966 and continued expansion through the 1970’s. Before 1965, there were many types of users of billboard advertising. Products advertised included cigarettes, cars, hotels and motels, candy, soda, alcohol, restaurants, airlines, dance clubs, drug stores, laundry and dishwashing detergents, toothpaste, and events. Both local and national advertisers used the medium, as a single billboard could target a specific geographical market. Advertisers worked on the premise that because so many people passed by their advertisements, they must be effective in creating sales. Many companies gradually learned that this was not true. The fact that someone drove past a ten-foot bottle of Palmolive dish detergent every day did not necessarily make that person more likely to switch to that brand. Audiences became immune to ads, ignoring them as part of the background, and the limited advertising features possible on billboards made them ineffective for many products. Certain types of products lent themselves better to billboard advertising than did others. For example, products or services aimed at travelers were prime candidates for successful billboard advertising. Many automobile travelers left aspects of their trips unplanned and thus were susceptible to suggestions offered by billboards. Billboard advertising was particularly 462

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effective for restaurants (especially fast food), hotels and motels, gas stations, and, to a lesser degree, entertainment services. Ads for the products were generally effective since potential customers had a need, could interpret the offer quickly, and knew where to receive the offer. Since the advertisements supplied the required information, they were successful. Some other types of companies also did well. For example, advertisements for specific events did well. Without a billboard, many people would not have been able to anticipate an event, and visitors would not know about it. Many companies, especially ones that sold supermarket products, discovered that billboard advertising was not very effective. There were many reasons that billboards were not effective for these types of products. Most viewers of billboards did not have an urgent need for toothpaste, for example, and billboards could not give any reasons to choose one brand over another. Procter and Gamble, a large producer of household products, was the number one advertiser on television in 1966. Television advertising was more expensive than billboards, but the company created more sales through television than through billboards. When Procter and Gamble compared sales produced in relation to cost, television advertising was less expensive. As another example, after being required to dismantle a Camel cigarette billboard in Times Square, the Reynolds Tobacco Company focused more of its advertising efforts on television. After 1970, however, when cigarette commercials were banned from radio and television, its efforts focused on billboards again. Local laws against sign use also hurt the billboard industry. In the 1970’s, Denver passed laws further restricting billboards and signs. The chief supporter of these tougher laws was Gerald Dixon, head of television at Columbia Broadcasting System (CBS). His advocacy hinted that declines in billboard use caused increases in television advertising. The Highway Beautification Act did not have a major direct effect on the decline of billboards. The first removal of a billboard as a result of the law did not occur until April 27, 1971. The main reason that offending billboards were not removed sooner was that the law stated that the owner of the billboard must be compensated. Because the federal government did not authorize a significant amount of funds until 1970, the states could not afford to compensate billboard owners. Many offending billboards existed long after the law passed. Some states even inquired if they could remove offending billboards and then compensate owners later, when federal funds came through. The answer was no, since the law clearly stated that there must be compensation for every billboard removed. 463

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The Highway Beautification Act of 1965 was only one of several reasons for the decline in billboard usage. Although billboards did not decline as much as roadside council and garden club members would have liked, the billboard industry certainly declined, while television and radio advertising continually increased. Advertisers found that broadcast media often proved to be worth their higher cost per message. Bibliography “Beauty and the Billboards.” The New Republic 154 (April 23, 1966): 8-9. Discusses the Outdoor Advertising Association of America and use of billboards by its members. Describes details of the law and funding for removal of billboards. Drew, Elizabeth Brenner. “Lady Bird’s Beauty Bill.” The Atlantic Monthly 216 (December, 1965): 68-72. Gives the details of the White House conference on the bill. Discusses the compromises made to get the bill passed and describes advertisers’ options under the bill. Gotfryd, Bernard. “Signs of the Times.” Newsweek 65 (March 8, 1965): 89-90. Describes the law concerning billboards before the Highway Beautification Act was passed. Discusses the billboard industry in general. Gould, Lewis. Lady Bird Johnson and the Environment. Lawrence: University Press of Kansas, 1988. This book accurately and in minute detail describes the Highway Beautification Act of 1965 and other programs of beautification on which Lady Bird Johnson worked. It also stresses the importance and rising power of first ladies. Pell, Robert. “Escalating Ugliness.” America 122 (June 12, 1965): 848-849. Discusses President Johnson’s initial desire for the beautification act and the White House conference on the bill. “The Sign Busters.” Newsweek 77 (June 7, 1971): 116-117. Discusses how the law has not had a large effect overall but how more stringent laws in some cities have been more effective in controlling billboard usage. Dan Kennedy Cross-References Advertisers Adopt a Truth in Advertising Code (1913); The Federal Trade Commission Is Organized (1914); The U.S. Government Bans Cigarette Ads on Broadcast Media (1970).

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CONGRESS PASSES THE MOTOR VEHICLE AIR POLLUTION CONTROL ACT Congress Passes the Motor Vehicle Air PollutionControl Act

Categories of event: Transportation; government and business Time: October 20, 1965 Locale: Washington, D.C. The Motor Vehicle Air Pollution Control Act authorized federal government standards to control emissions from cars, beginning with the 1968 model year Principal personages: A. J. Haagen-Smit (1900-1977), a professor of biochemistry and chief consultant on smog to the Los Angeles County Air Pollution Board in the 1950’s and 1960’s Kenneth Hahn (1920-1997), a Southern California politician Edmund Muskie (1914-1996), a U.S. senator from Maine, 1959-1980; chairman of the Senate Subcommittee on Air and Water Pollution in the late 1960’s Ralph Nader (1934), a leading consumer and environmental activist Summary of Event Air pollution existed as a byproduct of industrialization as early as the nineteenth century, in London. The term “smog” was coined to describe the combination of coal smoke and fog that periodically blanketed London. Somewhat inaccurately, the term began to be used in the United States in the late 1940’s and early 1950’s to describe a new kind of air pollution in the Los Angeles basin, a brownish, hazy, and eye-irritating atmospheric phenomenon resulting in large part from photochemical reactions to vehicular emissions. For a long time, smog was considered to be a peculiarity 465

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of Southern California, with its legendary dependence on the private automobile and a topography and weather patterns conducive to atmospheric pollution. A. J. Haagen-Smit, a professor of biochemistry at the California Institute of Technology, was a member of the scientific committee of the Los Angeles Chamber of Commerce. Increasing numbers of complaints came to the chamber from local farmers who protested the increasing and unusual damage to their crops. His initial findings indicated that the area’s smog was not caused by the kinds of gasses emitted by industrial operations. His continued investigations in the early 1950’s began to point to motor vehicles as the primary source of Los Angeles’ pollution. He found that automobiles emit pollutants in the following three ways: exhaust through the tailpipe includes carbon monoxide, nitrogen oxides, particulates, and hydrocarbons; evaporation from both the carburetor and gas tank contributes hydrocarbons; and “blowby” of hydrocarbons and particulates from the pistons to the crankcase puts these pollutants into the air. As air quality continued to worsen, the Southern California region set up the Air Pollution Control District, which had the power to declare “smog alerts” that were supposed to immediately result in decreased burning, restrictions in emissions from factory or refinery smokestacks, and decreased physical activity on the part of schoolchildren. All “nonessential” motor vehicle traffic was supposed to cease, but this regulation proved almost impossible to enforce on the increasingly clogged Los Angeles freeways. In correspondence with the chairman of the Los Angeles County Board of Supervisors as late as 1953, key automobile industry spokespersons seemed unwilling to concede the close connection between motor vehicle emissions and photochemical air pollution. It became increasingly difficult, however, to refute the growing evidence of this connection. The automobile companies began to concede that motor vehicles were a major factor in producing smog in Los Angeles but questioned whether that type of pollution could exist elsewhere in the country. Research in various locations, funded by the federal government beginning in 1955, provided good evidence that photochemical air pollution was not confined to Los Angeles. The surgeon general was directed to conduct studies of the physical damage caused by smog, but no other action occurred immediately at the federal level. Meanwhile, the problem became a major public policy issue in California. Not satisfied with the slow response from Washington, the increasingly powerful Southern California Air Pollution Control District pushed the California legislature to create a Motor Vehicle Pollution Control Board in 1960. It had the power to certify smog control technology and require its 466

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installation in new vehicles. The major automobile manufacturers by then had developed a positive crankcase ventilation device, which was to recycle blowby air back into the cylinder. California required this device to be installed in cars beginning in the 1961 model year. Increasing evidence from studies undertaken in California indicated that a significant reduction of air pollution, particularly hydrocarbon emissions, would depend on widespread adoption and usage of exhaust emission devices. Under continuing pressure from California, the largest single-state market for new cars, manufacturers promised to have exhaust devices ready by the 1967 model year. Recognition of air pollution caused by automobiles spread nationwide. In 1962, Congress approved the first of a series of laws that, over the next eight years, moved the federal government into a leadership position in antipollution efforts. This legislation directed the Department of Health, Education, and Welfare (HEW) to develop air quality criteria and to begin planning for investigative and abatement functions like those already in effect for water pollution. Guidelines developed by HEW remained advisory; state and local governments could choose whether to follow them. The 1962 act also directed HEW to encourage the automobile industry to develop devices to help control emissions of pollutants. HEW’s 1964 report Steps Toward Clean Air suggested that the growing air pollution problem would not be solved until there were national standards for vehicular emissions. This report attracted the attention of politicians such as Senator Abraham Ribicoff of Connecticut and Senator Edmund Muskie of Maine, who was named chairman of the new Senate Subcommittee on Air and Water Pollution. Appropriately, that subcommittee’s first public hearing was held in Los Angeles, in January of 1964. Governor Edmund G. “Pat” Brown of California testified that the continued enormous growth in the numbers of motor vehicles on his state’s roads meant that the problem could not be brought under control until the federal government used the interstate commerce clause to regulate emissions in newly manufactured cars. On the basis of these hearings, the subcommittee’s report concluded that automobile exhaust was “the most important and critical source of air pollution and it is, beyond question, increasing in seriousness.” Also in 1964, HEW issued a report documenting that automotive emissions posed a serious threat to physical health. Although automobile manufacturers claimed that they were working as fast as possible to upgrade abatement technology, they recognized the political reality that federal legislation was inevitable. They offered to drop their strong opposition to mandated exhaust standards in return for a two-year lead time and uniform 467

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nationwide (rather than diverse state) standards for exhaust manifold devices. The result of this heightened public awareness and political pressure was the passage on October 20, 1965, of the federal Motor Vehicle Air Pollution Control Act. Section 202 required the secretary of HEW to set emission standards, which would require that new vehicles achieve prescribed performance standards. Manufacturers could choose the most attractive technical means of reaching the standards, which were set by HEW in 1966 to be applicable nationwide in the 1968 model year. These regulations dealt primarily with carbon monoxide and hydrocarbons, under standards similar to the ones earlier mandated by California. Section 203 specified the ways in which manufacturers could apply for a certificate of compliance based on their prototype (rather than production line) vehicles. Impact of Event The automobile industry was concerned about this vast new area of government regulation. Business critics such as Ralph Nader, however, complained that the legislation was too loose and would lead to lax enforcement of standards. As a result of these criticisms, Congress in 1967 passed even tougher federal standards under the Air Quality Act. This piece of legislation mandated that federal emission standards for new vehicles were binding in all states except California. This cleared up a controversy as to whether the 1965 legislation permitted more stringent standards for individual states. California was now explicitly permitted to adopt, under certain circumstances, more stringent standards to meet its special needs. After 1967, vehicular pollution control policy, even in California, became more influenced by the federal government. This was especially true after the Clear Air Act Amendments of 1970 set up uniform air quality standards for the nation and also mandated controls to eliminate gasoline evaporation. This piece of legislation would soon be enforced by the powerful new Environmental Protection Agency (EPA), which set standards directed at controlling nitrogen oxides, carbon monoxide, lead, and particulate matter as well as hydrocarbons. This policy ultimately impelled the use of such control devices as catalytic converters and electronic carburetors on vehicles to control all these pollutants. Such new governmental controls affected other major industries as well. As one example, the Clean Air Act caused the EPA to encourage catalytic converter technology to control motor vehicle exhaust emissions. These converters required usage of unleaded gasoline, which requires much more intensive processing by refiners than does leaded gasoline. Although the Clear Air Act of 1970 had originally “required” America’s 468

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air to be clean by 1975, this soon proved impossible. The act was amended several times in later years. In addition, as automobile manufacturers pointed out, there never was an explicit and scientifically agreed upon standard as to what constitutes “clean air.” Nevertheless, much evidence indicates that progress was made in cleaning up the nation’s air in the 1970’s and 1980’s. In spite of millions of additional residents and cars in the Los Angeles basin, for example, there were fewer “smog alerts” in the early 1990’s than in the 1970’s. The 1977 amendments to the Clean Air Act made it more difficult to achieve new fuel conservation standards, as cleaner technology was not as fuel efficient. The largest American automobile producer, General Motors, estimated in a public interest report issued in the late 1970’s that the new emissions control equipment would add more than $200 to the cost of each vehicle. Furthermore, at the same time new vehicular safety features such as mandatory seatbelts added hundreds of dollars more to the price tag. Because of these high costs and, particularly in the early years, negative effects on automobile performance, emissions regulation was always controversial with the public as well as with manufacturers. In retrospect, questions should be raised about the price paid for emissions reduction on a set of rather stringent deadlines. As a study released by the Brookings Institution in 1986 concluded, Congress acted precipitately in constructing a program with tight deadlines and extremely ambitious goals. Congress had little information or theory on the effects of automobile pollution on human health. Blaming a combination of stringent standards and tight deadlines for jerry-built technologies, especially for the 1974 model year, the report cited higher costs and automobiles that suffered from less reliability and fuel efficiency as results of regulation. These negative effects of greater government controls occurred at a time of increasing competition from foreign automobile producers. Because of antitrust laws, American manufacturers were not allowed to cooperate in developing new technology for emissions control. In contrast, Japanese manufacturers were able to share research and development costs for an excellent emission control system, saving money for each company and making each more competitive in the American market. The enactment of federal regulations on automobile emissions during the 1960’s and 1970’s was a manifestation of the government’s perceived mandate to regulate that followed the Great Society era. Before 1965, the American automobile industry was subject to relatively little regulation of either its product or its manufacturing processes. Safety regulations, energy efficiency standards, and pollution regulations markedly changed this within a few years following 1965. 469

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Bibliography Crandall, Robert W., Howard K. Gruenspecht, Theodore E. Keeler, and Lester B. Lave. Regulating the Automobile. Washington, D.C.: Brookings Institution, 1986. This study provides analysis of the economic impact of three major types of federal regulation of the automobile. In particular, it points out the conflicting goals of each of the three programs (fuel economy, safety, and emission standards), which operated independently of one another. Kennedy, Harold W., and Martin E. Weekes. “Control of Automobile Emissions: California Experience and the Federal Legislation.” Law and Contemporary Problems 33 (Spring, 1968): 297-314. Details the growth of political pressure in the 1950’s from Southern California constituents on Congress to adopt federal legislation regarding motor vehicle pollution control. Lees, Lester. Smog: A Report to the People. Pasadena: California Institute of Technology, 1972. A landmark multidisciplinary study concerning air pollution in Southern California. Provides outstanding historical data on growth of the smog problem and development of alternative strategies to comply with the Clean Air Act in Southern California. Rae, John B. The American Automobile Industry. Boston: Twayne, 1984. An outstanding interpretive history. Chapter 11, “The Government and the Automobile Industry,” illuminates the critical combination of air pollution, automobile safety, and fuel efficiency regulation and how these had major effects on the financial and operating aspects of the automobile business. White, Lawrence J. The Automobile Industry Since 1945. Cambridge, Mass.: Harvard University Press, 1971. A scholarly study focusing on the economic aspects of the industry and how these were affected by both antipollution and safety legislation in the 1960’s. Discusses possible future technological breakthroughs but expresses doubt (which the passage of time has supported) that automobiles powered by the internal combustion engine will soon have major competition for transportation of individuals. Anthony Branch Cross-References Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965); Congress Passes the Motor Vehicle Air Pollution Control Act (1965); The Banning of DDT Signals New Environmental Awareness (1969); The Environmental Protection Agency Is Created (1970); The United States Plans to Cut Dependence on Foreign Oil (1974); Bush Signs the Clean Air Act of 1990 (1990). 470

NADER’S UNSAFE AT ANY SPEED LAUNCHES A CONSUMER MOVEMENT Nader’s UNSAFE AT ANY SPEED Launches a Consumer Movement

Category of event: Consumer affairs Time: November 29, 1965 Locale: New York, New York Ralph Nader’s publication Unsafe at Any Speed led to the passage of federal automotive safety regulations and began the U.S. consumer rights movement Principal personages: Ralph Nader (1934), an attorney and consumer advocate, author of Unsafe at Any Speed Lyndon B. Johnson (1908-1973), the U.S. president who signed the 1966 National Traffic and Motor Vehicle Safety and Highway Safety acts William Haddon, Jr. (1926-1985), a physician and first administrator of the National Traffic Safety Agency Warren Grant Magnuson (1905-1989), the Senate Commerce Committee chairman who conducted congressional automobile safety hearings Summary of Event Ralph Nader’s 1965 publication Unsafe at Any Speed: The Designed-in Dangers of the American Automobile posited a connection between the number of automobiles manufactured with mechanical or design defects between the years 1955 and 1965 and an increased number of vehicular accidents. This publication led to a greater public awareness of deficiencies in the manufacturing safety and design regulations of the United States 471

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automotive industry. The information provided by Nader was supplemented by testimony given during congressional automobile safety hearings which were promoted by Nader’s revelations. Data gathering and debate led to drafting of the National Traffic and Motor Vehicle Safety Act and the Highway Safety Act, signed into law by President Lyndon B. Johnson in 1966. These acts federally regulated the design of motor vehicles and marked the beginning of the United States consumer movement. Nader’s publication was based upon his research on the manufacturing of automobiles and how U.S. automakers resisted numerous governmental attempts to require improved safety standards. A 1959 Department of Commerce report predicted that by 1975 automobile accidents would cause fifty-one thousand deaths annually. Nader found that this automobile fatality number would be reached by 1965, with the increase in fatalities resulting from several defects that existed in the mechanical designs of automobiles. In response to these predictions, automobile manufacturers attributed the increased number of automobile deaths to driver negligence rather than mechanical failure. The 1960-1963 Chevrolet Corvair models manufactured by General Motors (GM) received significant attention from Nader. The car’s rear engine design resulted in several wheel suspension problems that caused many drivers to lose control of their automobiles. More than one hundred lawsuits against GM were initiated, prompting GM to redesign its 1964 and 1965 Corvair models to eliminate this defect. A 1965 study conducted by Consumers Union, the organization that tests products for the publication Consumer Reports, found that since 1955, when new automobile sales in the United States totaled approximately eight million, there had been a decrease in the quality standards of automobiles manufactured. Of the thirty-two automobiles randomly tested by Consumers Union, all were found to have defects within the first five thousand miles of test driving. In another study, in 1963, the American Optometric Foundation tested fifty-six automobiles and found that not one could provide a suitable visual environment for daytime driving. In 1965, a public television program entitled Death on the Highway connected specific design hazards with several brand-named automobiles, bringing national attention to the growing concern with automobile safety. Even with increased public awareness, the U.S. automobile manufacturers would not improve their safety standards. For example, in 1959, the New York State Joint Legislative Committee on Motor Vehicle and Traffic Safety had recommended that seat belts be sold as standard factoryinstalled equipment. In 1960, the automobile manufacturers’ lobbyists used their influence to defeat a bill that required seat belts on all new automobiles 472

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sold in New York. New York, like many other states, was unable to require rigid automobile safety standards because of the lobbying power of the automobile manufacturers. Undaunted by the automotive industry’s resistance to more stringent safety standards for the manufacturing of automobiles, Nader continued his consumer movement. In his testimony before Senator Warren Grant Magnuson’s automobile safety committee, Nader recommended that all automobiles should have seat belts, collapsible steering wheels, and passive passenger restraints. He also urged that automobile windows should be made of tempered glass, as in Europe, rather than the laminated glass in use in the United States. Laminated glass consists of a plastic glass core with glass bonded to it, while tempered glass is solid glass treated by heat. In an accident, laminated glass will not prevent a passenger from being ejected through the window and then being pulled back, with extensive facial lacerations a likely result. The stronger tempered glass would reduce the chances of a passenger being thrown through a window. Through his magazine articles, the book Unsafe at Any Speed, and testimony before Congress, Nader argued that the automobile industry had permitted stylistic concerns to take precedence over safe design and proper construction. He further believed that not only automakers were blameworthy; the general state of American industry favored profit over improved technology, even at the expense of the consumer. Nader contended that food and drug violations, defective automobiles, professional malpractice incidents, and other business crimes were more detrimental to the safety and health of society than were violent street crimes. Nader’s publications and publicized testimony before Congress began a consumer movement and eventually influenced Congress to pass laws to protect the safety of consumers. Impact of Event In 1966, the National Traffic and Motor Vehicle Safety Act and the Highway Safety Act were signed into law, largely because of the influence of Nader’s book Unsafe at Any Speed, which built public and congressional support for stronger automobile safety legislation. These acts listed twentysix safety standards for 1968 automobile models that were to be implemented by January 31, 1967. These standards included provision of equipment as recommended in Nader’s book: collapsible steering columns, safety glass and glazing materials, air pollution control devices, anchors for both lap and shoulder belts, and recessed instrument panels. In addition, the National Traffic Safety Agency was formed to ensure that automobile manufacturers complied with these acts. The first administrator in charge 473

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A crash-test dummy is used in early testing of automobile air bags. (National Highway Safety Administration)

of the National Traffic Safety Agency was William Haddon, Jr. The important aspect of this legislation was the power given to the federal government to regulate American automobile manufacturers. This legislation marked the first time that the government departed from its “hands-off” approach. It also represented some of the first proconsumer legislation to be passed by the government. In 1967, the National Traffic Safety Agency became the National Highway Safety Bureau (NHSB), part of the newly formed Department of Transportation. Haddon was named as the first director of the NHSB. Within the first two years of the NHSB’s existence, twenty-nine motor vehicle safety standards were issued, and ninety-five more were proposed. The automotive industry had made seat belts standard equipment, but the NHSB required shoulder harnesses to be installed on all new automobiles manufactured on January 1, 1968, or after. In 1969, automobile air bags received national attention as a result of public hearings before Senator Magnuson’s Commerce Committee. Nader by that time had recruited several attorneys from Harvard Law School into his consumer movement. With funding from Consumers Union and from Nader’s own sources, lobbyists urged legislators to support a requirement that all new automobiles manufactured be equipped with air bags. General Motors had quietly tested air bags in the early 1950’s, but technical diffi474

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culties and lack of adequate proof that the air bags reduced passenger injuries during an accident led GM to discontinue this program. In November, 1970, after an executive reorganization, the NHSB became the National Highway Traffic Safety Administration (NHTSA). It interpreted the safety laws differently than had its predecessor, the NHSB. According to the NHTSA, air bags were not the only equipment that complied with the passive resistance safety standards set forth earlier by Magnuson’s committee hearings. Alternatives included fixed cushions within the vehicle interior, self-fastening seat belt systems, and crash-deployed blankets. It was not until 1989 that federal legislation required automakers to provide passive restraints on all new automobiles. Automobile safety served as a starting point both for Nader as a consumer advocate and for the consumer movement in general. Throughout the late 1960’s and early 1970’s, Nader exposed the unsafe environment that existed for consumers and society. Nader demonstrated that packaged foods in supermarkets sometimes contained carcinogenic (cancer-producing) ingredients to preserve their visual appeal to consumers. In addition, he castigated the meatpacking industry for transforming diseased and decayed meat into supposedly safe items. In his research, Nader found that poor sanitation facilities led to the inclusion of insect remains and rodent fragments in the frankfurters sold in the supermarkets. He contended that the chemical colorings that cosmetically improved the appearance of meat could also impair the health of the consumer. As a result, Congress passed the Wholesome Meat Act (1967) and the Wholesome Poultry Act (1968). Nader’s research extended to the workplace, based on his premise that workers were part of his consumer advocacy movement. Nader publicized occupational hazards that ranged from numerous cases of brown lung disease in cotton mill workers to cancer-producing X-ray radiation doses to which medical technicians were exposed. In 1967, Congress passed the Radiation Control for Health and Safety Act as a result of Nader’s consumer safety public campaigns. Nader believed that three principal forces were necessary to strengthen the consumer movement: pressure on federal, state, and local legislators; workers “blowing the whistle” on illicit practices of their companies; and development of a citizen-initiated political action organization to be a “watchdog” for corporate abuse. Nader testified and lobbied for numerous reforms. As a result of his pressure, consumer laws were passed relating to natural gas and pipeline safety, occupational health and safety, and coal mine health and safety. Although Nader could not infiltrate corporations, Nader’s movement encouraged employees to speak out against their corporations. With his own funding, Nader created Public Interest Research 475

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Groups (PIRG) in the 1970’s on college campuses. He urged students to set up PIRG organizations to research issues and lobby for consumer causes. By 1975, more than 145 PIRGs were on campuses throughout twenty states, thus completing Nader’s dream to mobilize a nation of consumer advocates. Nader’s investigations on automotive safety tied into the belief that highway laws could reduce the number of vehicular accidents. One such law involved requiring seat belts. In 1978, Tennessee became the first state to require seat belt restraints for young children. By 1985, all fifty states had enacted child restraint laws. Another debate focused on the issue of lowering speed limits, both as a means of promoting safety and as a way of conserving gasoline. Nader’s efforts and the consumer movement in general won widespread approval but led to some questions. Manufacturers continued to raise the argument that free markets provided the safety measures that consumers demanded. If consumers truly wanted increased safety, the argument ran, some entrepreneur would be willing to offer it on the market for a profit. Legislation requiring additional safety measures therefore forced consumers to purchase more safety than they were willing to pay for and more than they thought worth the cost. As consumers became more aware of safety issues, sellers were forced to confront lawsuits charging products with being unsafe. A dilemma remained of how many accidents were worth paying to prevent. Bibliography Burda, Joan M. An Overview of Federal Consumer Law. Chicago: American Bar Association, 1998. Practical guide prepared by the American Bar Association. Graham, John D. Auto Safety: Assessing America’s Performance. Dover, Mass.: Auburn House, 1989. Explains the thirty-year struggle to resolve the controversy over the use of occupant restraint systems in motor vehicles. Depicts the effect of the 1966 safety acts on the automobile industry and the consumer. _____, ed. Preventing Automobile Injury: New Findings from Evaluation Research. Dover, Mass.: Auburn House, 1988. A representation of thencurrent research on motor vehicle-related injuries and recommendations to prevent automobile injuries. The findings are based upon the collaborative efforts of several medical and educational institutions. Consists of major papers and comments by those who made presentations at or participated in the New England Injury Prevention Research Center Conference in December, 1987. 476

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Holsworth, Robert D. Public Interest Liberalism and the Crisis of Affluence: Reflections on Nader, Environmentalism, and the Politics of a Sustainable Society. Cambridge, Mass.: Schenkman, 1980. A discussion of the beginning of the consumer movement and Ralph Nader’s contributions to it. Although the book discusses the consumer consciousness of the 1960’s, it also depicts the apathy of consumers in the 1970’s. This book is intended more for academicians than for the general reading public. McCarry, Charles. Citizen Nader. New York: Saturday Review Press, 1972. Discusses Nader’s consumer movement and his enemies. Focuses on the negative aspects of Ralph Nader as a consumer advocate, private citizen, and writer. This book’s merit is that the reader can view Nader from an oppositional stand. Good psychological portrait of Nader. Nader, Ralph. Unsafe at Any Speed: The Designed-in Dangers of the American Automobile. New York: Grossman, 1965. An attack on the U.S. automobile manufacturing industry. Its central argument is that automobile manufacturers sold vehicles that they knew were unsafe in the name of profit. Sanford, David. Me and Ralph: Is Nader Unsafe for America? Washington, D.C.: New Republic, 1976. Book about Nader by a personal associate. The focus is on the events that surrounded Nader and Sanford’s interpretation of Nader’s reaction to these events. Some of the stories are trivial and biased, but they give interesting perspectives on Nader. U.S. Congress. House. Committee on Government Operations. Government Activities and Transportation Subcommittee. The Administration’s Proposals to Help the U.S. Auto Industry. 97th Congress, 1st session. Washington, D.C.: Government Printing Office, 1981. Hearings before a subcommittee held on May 13 and 14, 1981. Contains transcripts, statements, and letters. Martin J. Lecker Cross-References Congress Passes the Pure Food and Drug Act (1906); Congress Passes the Motor Vehicle Air Pollution Control Act (1965); Congress Passes the Consumer Credit Protection Act (1968); The United States Bans Cyclamates from Consumer Markets (1969); Congress Passes the Fair Credit Reporting Act (1970); Nixon Signs the Consumer Product Safety Act (1972).

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ATLANTIC RICHFIELD DISCOVERS OIL AT PRUDHOE BAY, ALASKA Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska

Category of event: New products Time: December 26, 1967 Locale: Prudhoe Bay, Alaska The search for new oil fields produced a major find at Prudhoe Bay, Alaska, setting off a lengthy battle with environmentalists over the development of this resource Principal personages: Robert O. Anderson (1917), the head of Atlantic Richfield and one of the great oil wildcatters Ted Stevens (1923), the state of Alaska’s primary spokesman in the Senate Mo Udall (1922-1998), the most vocal critic of the Alaskan oil pipeline in the United States House of Representatives Summary of Event The Naval Petroleum Reserve was created on the North Slope of Alaska in 1923, nearly a half century before the first oil was to flow from wells in America’s northernmost state to consumers in the lower forty-eight states. During the 1920’s and again in the 1930’s, the challenge of Alaska’s uncharted resources combined with projected shortages in the United States and world petroleum markets to encourage exploratory drilling in Alaska. On both occasions, however, the exploratory wells came up dry. The exploratory ventures were seen more as a hedge against the future than the first step in massive commercial development of Alaska’s oil wealth. The cost of drilling in Alaska appeared prohibitive, and the technology for 478

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transporting significant quantities of any oil discovered there did not yet exist. During the late 1940’s and early 1950’s, oil was discovered in Kuwait and in new, rich oil fields elsewhere in the Middle East. Oil could be produced much more cheaply in those fields than in the United States. Transportation costs had fallen as well. Interest in Alaska’s unproven reserves therefore fell even lower. Given the conditions of the 1950’s, when American leaders still talked in Congress about America’s strategic petroleum reserves in Saudi Arabia and when the danger of market gluts and depressed prices resulting from the new fields in the Middle East had become the principal problems confronting producers, concern with the danger of shortfalls in supply faded fast. Most of the remaining interest in further exploratory drilling in Alaska disappeared as well. The world oil market changed dramatically during the late 1950’s and early 1960’s. The major Western oil companies that had controlled the world petroleum market for nearly a half century began to lose their hold on the market. The existing profit-sharing system with host governments, which a decade before had replaced the concession system, no longer satisfied the governments of the states in which oil was produced, especially in an era of falling oil prices and concomitant falling governmental revenue. In 1960, Standard Oil of New Jersey’s unilateral attempt to reduce the posted price of oil spurred governments of five oil-producing states, representing three-fourths of the oil then being exported, to unite in an openly declared effort to wrest control over price and production from the major oil companies. Out of their frustration was born the Organization of Petroleum Exporting Countries (OPEC). OPEC would not achieve major international status until the Arab oil embargo of 1973, but its creation served as an early warning that the United States would be better served by having its strategic petroleum reserves nearer to home, as in the Naval Petroleum Reserve in Alaska. Also contributing to reawakening interest in Alaska were increases in the posted price of oil during the 1960’s. The expanding Western economies increased their demand for oil and, at the urging of the producer state governments, the Western petroleum corporations regularly increased the posted price of oil on the international markets. The cost of producing oil in Alaska no longer seemed quite as commercially prohibitive as it once had. During the mid-1960’s, the increasing price of oil and decreased confidence in maintaining a supply of cheap oil from abroad combined to lure an expanding number of American firms into exploratory ventures abroad (for example, Occidental in Libya) and at home (chiefly along the Outer Continental Shelf). Consistent with this atmosphere, the California-based 479

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Richfield Company, together with its Humble subsidiary, launched a joint exploratory project with the Atlantic Refining Company on the North Slope of Alaska’s Prudhoe Bay. Under the leadership of Robert O. Anderson, one of America’s last great oil wildcatters, the Atlantic Richfield Company (later ARCO) obtained the majority of the government leases then being granted for exploratory and developmental activity in Alaska. Even after its initial well proved to be dry in 1966, Atlantic Richfield pressed on with its exploratory efforts. The exploratory well Atlantic Richfield began drilling in 1967 might well have been the last such well tried in Alaska for some time, if not forever, had it too come up dry. On December 26, 1967, however, the well christened Prudhoe Bay State Number 1 produced oil. Approximately six months later, a second well confirmed the presence of a vast commercialscale pool of oil beneath Prudhoe Bay’s frozen banks. In time, the pool would be estimated to contain ten billion barrels, making it the largest oil field ever discovered in North America. With the potential to produce two million barrels of oil a day, the field was estimated to have a higher production capacity than all but two other fields in the world. Impact of Event Had the oil field been developed rapidly, the history of the petroleum industry during the next quarter century could have been written differently. The United States would have had far less need for imported oil in the early 1970’s, and the Arab oil embargo in 1973 would have been far less effective. Additional years might even have been required for OPEC to obtain control over the price and production of oil in its member countries. As it was, the significance of finding oil in Alaska was initially blunted by the technological problem of transporting the oil eight hundred miles to port facilities for shipment south and by equally vexing political problems making it difficult for oil producers in Alaska to get the oil to American consumers in the lower forty-eight states. Technologically, moving the oil from wellhead to gas tank meant overcoming the obstacles to producing the oil in volume in the subzero temperatures of Alaska’s North Slope and transporting it by pipeline through the frozen tundra either to the port of Valdez for shipment by tankers to California or across Alaska and then Canada to consumers in the United States. These obstacles appeared surmountable to Atlantic Richfield, which supported the Valdez route and initially expected to ship oil from that port within three years. No sooner had the second well confirmed the presence of large reserves than the heavy equipment for constructing a pipeline began to arrive in Alaska. 480

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The political obstacles to exploiting the oil field proved to be less negotiable. Many environmentalists doubted that the petroleum industry had the knowledge to build a safe eight-hundred-mile pipeline across Alaska’s frozen landscape without doing significant ecological damage. If a pipeline did have to be built, most environmentalists advocated as less risky the longer route across Canada. They made it clear that they would do everything in their power to prevent the construction of the Valdez pipeline. The Santa Barbara oil spill in 1969 and the National Environmental Protection Act (NEPA) passed in its wake came at approximately the same time that the oil companies were requesting a federal right of way to build the Valdez pipeline. The NEPA required the United States Department of the Interior to prepare a justifying environmental impact statement before granting permission to begin activity on any project likely to have a substantial impact on the environment. On March 20, 1970, the Department of the Interior sought to comply with the letter of the law by issuing an eight-page statement of impact that downplayed potential damage to the environment. Within a week, the Wilderness Society, the Friends of the Earth, and the Environmental Defense Fund jointly sued the Department of the Interior for violating the National Environmental Protection Act and the 1920 Mineral Leasing Act. Three weeks later, on April 13, 1970, a court injunction halted construction on the pipeline until a definitive court ruling on compliance with the NEPA could be obtained. Work on the pipeline remained suspended for nearly four years. Two of those years were spent in judicial wrangling. On March 20, 1972, the Department of the Interior produced an expanded nine-volume environmental impact statement to justify its approval of the pipeline’s construction, but the injunction remained in effect until August 15, 1972, when the case was appealed to the Supreme Court. The equipment sent to Alaska to build the pipeline was still idle in October, 1972, when the Arab-Israeli war triggered the Arab oil embargo against Western countries assisting Israel. That embargo made the Organization of Petroleum Exporting Countries a cartel effectively in control of the price and production of oil in the petroleum exporting world and produced an almost overnight quadrupling in the price of imported oil from slightly less than $3 a barrel to nearly $12 a barrel. Also almost overnight, the atmosphere in Congress changed on the matter of constructing the trans-Alaskan pipeline. A measure to approve the Interior Department’s last environmental impact statement, relieve the Department of the Interior of further obligations under the NEPA, and approve the construction of a pipeline from Prudhoe Bay to Valdez was passed on November 16, 1973, less than a month following the announcement of the 481

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Arab oil embargo. By April, 1974, the monumental $10 billion task of constructing an environmentally friendly pipeline was at last under way. The pipeline was completed in 1977. Within a year it was carrying a million barrels of oil per day from the North Slope to port facilities in Valdez. By the early 1980’s, the amount being transported had doubled, stemming America’s appetite for imported oil. The development came too late to prevent a second oil crisis in 1979 from driving the price of imported oil to almost $38 per barrel but not too late to contribute to a general decline in Western demand for OPEC oil in the mid-1980’s. The availability of Alaskan oil exerted such pressure on the cohesiveness of the OPEC organization that it lost substantial control over the production rates of member states and was powerless to prevent the posted price for a barrel of oil from slipping briefly below $10 before stabilizing in the late 1980’s at approximately $20. Political issues played a large part in the decline of OPEC’s power, but the availability of Alaskan oil surely contributed to that decline. Bibliography Berry, Mary Clay. The Alaska Pipeline: The Politics of Oil and Native Land Claims. Bloomington: Indiana University Press, 1975. An insightful account of the impact of the Alaska pipeline on the development of the “two Alaskas”—the one of natives and the one of oil. Chasan, Daniel Jack. Klondike ’70: The Alaska Oil Boom. New York: Praeger, 1971. A good account of the impact of oil on Alaska in the form of a very readable narrative covering the first days of the oil rush that followed Atlantic Richfield’s discovery of oil. Coates, Peter A. The Trans-Alaska Pipeline Controversy: Technology, Conservation, and the Frontier. Bethlehem, Pa.: Lehigh University Press, 1991. A good study of the confrontation between environmentalists and the energy developers seeking to build the trans-Alaskan pipeline, examined in the context of a century of confrontation between environmentalists and developers over Alaskan resources. Davidson, Art. In the Wake of the Exxon Valdez. San Francisco, Calif.: Sierra Club Books, 1990. An in-depth, often technical analysis of the spill of approximately ten million gallons of petroleum in Prince William Sound. Dixon, Mim. What Happened to Fairbanks? The Effects of the TransAlaska Oil Pipeline on the Community of Fairbanks, Alaska. Boulder, Colo.: Westview Press, 1979. Two years of fieldwork produced a volume of considerable insight and a few surprises pertaining to the unintended effects of the pipeline’s construction on life in Fairbanks. Jorgensen, Joseph G. Oil Age Eskimos. Berkeley: University of California 482

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Press, 1990. A solid interpretation of the effect of energy development and monetary compensation for oil rights on one of the poorest groups of Native Americans. Joseph R. Rudolph, Jr. Cross-References Discovery of Oil at Spindletop Transforms the Oil Industry (1901); The Teapot Dome Scandal Prompts Reforms in the Oil Industry (1924); Arab Oil Producers Curtail Oil Shipments to Industrial States (1973); The United States Plans to Cut Dependence on Foreign Oil (1974); The Alaskan Oil Pipeline Opens (1977).

483

CONGRESS PASSES THE CONSUMER CREDIT PROTECTION ACT Congress Passes the Consumer Credit ProtectionA ct

Categories of event: Consumer affairs and finance Time: May 29, 1968 Locale: Washington, D.C. The Consumer Credit Protection Act required creditors to provide clear and adequate information about the cost of borrowing and enacted protection regarding wage garnishment and loan sharking Principal personages: Paul Douglas (1892-1976), a Democratic senator from Illinois who introduced truth-in-lending legislation in the Senate William Proxmire (1915), a Democratic senator from Wisconsin who supported passage of the bill in the Senate Leonor Sullivan (1903-1988), a Democratic member of the House of Representatives from Missouri who authored and gained passage of the House version of the bill A. Willis Robertson (1887-1971), a Democratic senator from Virginia Richard H. Poff (1923), a Republican member of the House of Representatives from Virginia who offered the loan-sharking amendment to the bill as part of an anticrime program Summary of Event The Consumer Credit Protection Act was signed into law by President Lyndon B. Johnson on May 29, 1968. The law had the longest legislative history of any consumer bill. It was introduced each year in the Senate beginning in 1960 but failed to receive committee approval for eight years. Despite the long struggle to get it passed, the final legislation was stronger than the original version. 484

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Consumer protection began early in the history of the United States, primarily as governmental regulation of economic activities. The Interstate Commerce Act of 1887 was the first federal legislation that regulated an industry. It resulted in the creation of the first regulatory commission, which produced rules that were models for later legislation designed to ensure consumer protection. Legislation in the early twentieth century focused on the safety, purity, and advertising claims of foods, drugs, and cosmetics. The Federal Trade Commission was set up in 1914 to maintain free and fair competition and to protect consumers against unfair or misleading business practices. After World War II, Americans were eager to buy new products. Because they had come to trust producers and believed themselves to be protected by government oversight, they had little concern about the quality or safety of products. Goods were produced as quickly as possible to satisfy demand. Advertising gained a new level of sophistication by playing to the psychological needs of individuals. In 1957, these tactics were exposed in a book called The Hidden Persuaders by Vance Packard, and the buying public became indignant. The consumer movement began to take shape. The idea of truth in lending originated with Senator Paul Douglas, who believed that lenders deceived borrowers about the true annual rate of interest. The practice of charging interest on the original amount of the loan, rather than on the declining balance as an installment loan was paid off, resulted in a true annual rate that was sometimes as high as twice the stated rate. Consumers, who generally were not knowledgeable in financial matters and were unaware of the methods of interest calculation, were paying a high cost for credit. They were unable to compare the costs of borrowing from various lenders because there was no requirement of standard, accurate, and understandable disclosures of the actual cost of borrowing. In 1960, Douglas introduced a truth-in-lending bill in the Senate. In addition to requiring disclosure of the dollar amounts of the loan, the down payment, charges not related to the financing, and the total financing charges, the bill also required finance costs to be disclosed as an annual interest rate, based on the unpaid balance of the loan. Retailers, banks, and loan companies objected to the annual percentage rate (APR) disclosure requirement. First, it was argued that consumers were accustomed to the monthly rates currently reported and would find the change confusing. Second, many sellers believed that the reporting of a much higher “true” annual rate of interest would result in reduced consumer purchases. Some argued that this would seriously hurt the economy. Other objections included the contention that the law would not do any good, since the cost of merchandise could simply be increased to hide the cost of credit, and that 485

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regulations in this area were the responsibility of the states, not of the federal government. In addition, it was feared that it would be costly and difficult to train retail personnel in the new credit procedures necessary to comply with the requirements. Consumer protection supporters and activists were primarily liberal Democrats, and consumer protection bills were initially seen as part of a liberal agenda. Voting in committees was mostly partisan. This slowed consumer legislation in Congress. Business organizations also lobbied against most consumer legislation. Interference from the federal government was considered to be unnecessary and an infringement on their rights. In 1960, John F. Kennedy campaigned for election as president as an advocate of consumer protection. Once elected, he proposed a “Consumer Bill of Rights,” to include the right to safety (protection against dangerous products), the right to be informed (protection against fraud and misinformation), the right to choose (adequate competition), and the right to be heard (government responsiveness to consumer issues). Kennedy asked Congress to enact new food and drug regulations, strengthen antitrust laws, and pass truth-in-lending legislation. In the version of the bill proposed in 1964, revolving credit arrangements, such as retail store credit accounts, were exempted from the annual percentage rate disclosure. The bill gained more acceptance, but it died because of strong opposition by the chair of the Committee on Banking and Currency, Senator A. Willis Robertson. In the 1966 election, senators Douglas and Robertson lost their bids for reelection so were no longer on that committee in 1967 when Senator William Proxmire reintroduced the bill. Senator Proxmire was more willing than Senator Douglas had been to bargain and compromise. The bill was debated in the Financial Institutions Subcommittee of the Committee on Banking and Currency. The bill cleared the subcommittee and the committee, then was passed by the Senate by a 92-0 vote. Congress’ attitude toward consumer bills was changing dramatically as a tide of consumer activism grew in the United States. The National Traffic and Motor Vehicle Safety Act of 1966 had proved to be a popular bill. Media coverage played an important role in the passage of that bill and helped gain attention for other pending consumer legislation. Leonor Sullivan, an eight-term Democratic congresswoman on the Consumer Affairs Subcommittee of the House Committee on Banking and Currency, authored the House version of the truth-in-lending bill. After battling unsuccessfully to strengthen the bill in the committee, she fought vigorously on the House floor, where several amendments were added, making the bill stronger than the Senate version. The APR disclosure exemption for revolving credit was dropped. Restrictions were included on 486

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wage garnishment, whereby an individual’s earnings are withheld from his or her paycheck for repayment of debt. Loan sharking was made a federal offense, with severe penalties when interest rates were charged in excess of the usury levels in each state. The bill also established a Consumer Finance Commission to study the consumer finance industry. Publicity and strong public support for the bill resulted in the stronger House version clearing the conference committee. The main section of the bill is Title I, the Truth-in-Lending Act, which requires, before credit is extended, disclosure of the APR and all finance charges, as dollar amounts, along with other loan terms and conditions. Advertisements that included certain financing terms required further elaboration. Specifically, any advertisement that included the down payment, the amount of each payment, the number of payments, the period of repayment, the dollar amount of any finance charge, or a statement that there was no charge for credit also had to disclose the cash price or the amount of the loan; the amount of down payment or a statement that none was required; the number, amount, and frequency of payments; the annual percentage rate; and the deferred payment price or the total dollar amount of the payments. Additionally, the bill provided for the right of the consumer to cancel a consumer credit agreement within three days if a second mortgage was taken on the consumer’s residence. The Federal Reserve Board was required to draft regulations that implemented the law. Regulation Z was issued on February 10, 1969. Regulations were to be enforced by nine different federal agencies, including the Federal Trade Commission, the Federal Reserve Board, the National Credit Union Administration, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, the Interstate Commerce Commission, the Civil Aeronautics Board, and the Agriculture Department. Impact of Event In 1960, when Senator Douglas first introduced truth-in-lending legislation, there was little support for consumer issues in Congress. The powerful business community and the credit industry were opposed to the bill. Politics, partisanship, and special interests stalled the bill for many years. The refusal of Senator Douglas to publicly question the ethics of members of Congress with special interests or to question banks’ opposition to the bill helped enable the fight to go on for years without much publicity. Growing consumer support for protective legislation was in part the result of the consumer protection activities of Ralph Nader. Nader’s investigation of shortcomings in automobile safety resulted in General Motors (GM) having him followed and investigated. The public was outraged at GM’s 487

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attempts to discredit Nader. Media coverage further fueled consumer demands for protection from unscrupulous business practices. The Ninetieth Congress, which finally passed the Consumer Credit Protection Act, was described by President Johnson in his 1968 State of the Union message as “the Consumer Congress.” The Consumer Credit Protection Act was intended to protect unsophisticated consumers from the hidden costs of borrowing or buying on credit. The concern of business that customers would buy fewer goods and borrow smaller amounts when they became aware of the true annual cost of borrowing apparently was unfounded, although it is impossible to say what consumer behavior would have been in the absence of the law. Continued use of credit in the early 1980’s, with its high inflation and high interest rates, seemed to indicate that consumers were willing to use credit at almost any cost. When inflation was high, consumers learned that delaying their purchases resulted in a higher cost of goods, leading them to purchase immediately even at high interest rates. They continued to use credit even when the APR rose above 20 percent. Interest rates generally dropped in the later 1980’s, but credit card interest rates remained high. Consumers, however, continued to increase their credit card debt. The original truth-in-lending bill of Senator Douglas was intended to introduce competition to the area of consumer credit. Douglas had hoped that with comparable APR information, consumers would be able to shop for the best rates. One of the results of the legislation appeared to be that some businesses ceased to advertise their credit terms and rates. Whether this was a result of the truth-in-lending act or the tight supply of money soon after the law was enacted is difficult to ascertain. The main purpose of the bill would not have been realized if creditors gave little or no information in attempts to avoid violating the law. Businesses were concerned about the cost of implementing the regulations. Costs arose from training employees, redesigning credit agreement forms to comply with required standards, educating customers about the information being provided to them, and calculation of complex APRs. In general, businesses found that these costs were not as high as had been anticipated. The government provided rate tables to figure APRs, and training and education did not require much time for most businesses. In 1971, the act was expanded to include a restriction on credit card issuers that they could not send unsolicited credit cards to consumers. A fifty-dollar limit was put on a credit cardholder’s liability if there was unauthorized use of the card (for example, in case of a lost or stolen card). If the issuer was notified before any unauthorized use occurred, the cardholder was not liable for any charges. The Truth-in-Lending Simplification 488

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and Reform Act of 1982 was passed with a revised Regulation Z that corrected several weaknesses and ambiguities in the original law. Further legislation covered other areas of concern. The Fair Credit Reporting Act (1971) dealt with credit reporting agencies, their practices, and consumers’ rights regarding information in their credit files. The Fair Credit Billing Act (1974) dealt with billing errors and procedures to handle them. The Equal Credit Opportunity Act (1975 and 1977) prohibited discrimination in the granting of credit and provided for prompt responses to consumers regarding the acceptance or rejection of their credit applications. This act especially benefited women, who had previously had difficulties obtaining credit. The law required that credit decisions be made on the basis of qualifications regarding financial status rather than characteristics such as sex, marital status, race, age, religion, or national origin. The Fair Debt Collection Practices Act (1978) protected consumers from deceptive and abusive debt collectors and established procedures for debt collection. The Electronic Funds Transfer Act (1978) established the rights and responsibilities of users of electronic funds transfers. Consumer outcries and the pressure put on Congress to act in the interest of its constituents, the consumers, led to this flood of legislation that followed the Consumer Credit Protection Act of 1968. It brought much more regulation to business than was previously envisioned. The cost of the regulation and the resulting benefit to consumers are difficult to measure. The impact clearly has been an increase in consumer rights and a betterinformed buying public. Bibliography Blackburn, John D., Elliot I. Klayman, and Martin H. Malin. The Legal Environment of Business. 3d ed. Homewood, Ill.: Irwin, 1988. In a chapter on debtor-creditor relations, this college textbook for business students describes the laws that apply to consumer protection. It includes cases to illustrate the application of the law and the opinion of the courts on those cases. Burda, Joan M. An Overview of Federal Consumer Law. Chicago: American Bar Association, 1998. Practical guide prepared by the American Bar Association. Eiler, Andrew. The Consumer Protection Manual. New York: Facts on File, 1984. Describes the laws that protect consumers and gives specific advice to consumers so that they can demand the rights they have under those laws. Gives detailed information about the legal system. This is a how-to book with sample letters to help consumers put their complaints into writing to achieve results. 489

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Faber, Doris. Enough! The Revolt of the American Consumer. New York: Farrar, Straus and Giroux, 1972. This well-written book gives a fascinating history of the consumer movement. Much of the book is based on interviews. Suggests additional readings that would provide the interested reader with a detailed background. Nadel, Mark V. The Politics of Consumer Protection. Indianapolis: BobbsMerrill, 1971. Part of a policy analysis series that describes and analyzes public policies generated by national, state, and local governments. It examines consumer politics, participants in policy decisions, and the role of the press and consumer activists in influencing policy decisions. “The Truth About Credit Is Coming.” Consumer Reports (August, 1968): 428-431. A report from Consumers Union, a consumer protection organization that tests and reports on consumer products and consumer issues. This article informs consumers about the law and how it will affect them. The article gives opinions as well as facts. Rajiv Kalra Cross-References Congress Passes the Pure Food and Drug Act (1906); The Federal Trade Commission Is Organized (1914); Congress Passes the Fair Credit Reporting Act (1970); Congress Prohibits Discrimination in the Granting of Credit (1975).

490

THE UNITED STATES BANS CYCLAMATES FROM CONSUMER MARKETS The United States Bans Cyclamates from Consumer Markets

Category of event: Consumer affairs Time: October 18, 1969 Locale: Washington, D.C. Evidence that consumption of cyclamates may be harmful to humans’ health led to their removal from the United States marketplace Principal personages: Herbert Ley (1923), the commissioner of the United States Food and Drug Administration, 1968-1969 Robert Finch (1925-1995), the secretary of Health, Education, and Welfare, 1969-1970 Marvin S. Legator (1926), an FDA scientist who studied the effect of cyclohexylamine injections on rats Umberto Saffiotti (1928), a doctor affiliated with the National Cancer Institute who was instrumental in forwarding the results of cyclamate research to the Department of Health, Education, and Welfare Summary of Event On October 18, 1969, Secretary of Health, Education, and Welfare Robert Finch announced that food products containing cyclamates would be banned from the U.S. markets effective February 1, 1970. This decision was made after several scientific studies revealed that certain amounts of cyclamates were harmful to chicken embryos and rats. Prior to the development of artificial sweeteners, only natural sugars, in forms such as sugarcane, corn syrup, maple sugar, and honey, were used in 491

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food products. These sugars are high in calories and are unhealthy for a small proportion of people afflicted with medical conditions such as diabetes. Artificial sweeteners have much lower caloric contents than natural sugars and can be used by consumers who cannot safely ingest sugar. Only a small percentage of the United States population must abstain from sugar, but many consumers choose to purchase foods and beverages produced with low-calorie sugar substitutes as part of weight-control programs. A growth in consumption of artificial sweeteners would coincide with a reduction in the market for sugar. This shift threatened sugar producers, who supported testing and research on the artificial substances to determine if they might have adverse physiological effects on consumers. Because some consumers need to restrict or discontinue consumption of sugar for medical reasons and other consumers wish to reduce caloric intake, a substantial market for artificial sweeteners had developed in the United States by the mid-1960’s. Ideally, a sugar substitute should taste identical to sugar, perform as sugar does in food preparation, and not adversely affect the health of those consuming it. Chemists have attempted to create such a product, but time and research have shown that many artificial sweeteners have limited merits. In the two decades prior to 1969, cyclamates had been the primary substitute for sugar in diet-type food products. A cyclamate is an artificial (chemically produced) salt of sodium or calcium. Cyclamates have a sweet taste similar to that of sugar and contribute virtually no calories to foods and beverages in which they are used. By the late 1960’s, the consumption of diet soft drinks, diet fruit jams and jellies, and table sugar substitutes had become widespread. Using cyclamates as sweeteners, soft drinks were made calorie free, and canned fruits and jams were produced with significantly reduced caloric contents. Diet soft drink producers consumed more than half the cyclamates produced in the United States and, according to Business Week, collectively manufactured products worth $420 million at retail prices in 1969. Of all soft drinks sold in 1969, 15 percent were diet drinks. These drinks thus had substantial effects on the financial performance of manufacturers. Producers of artificial sweeteners pursued development of their products because they believed there was a potentially large market of diet-conscious people who would willingly pay for the sweetening agents. The possibility for large profits was a motivating factor for producers, as artificial sweeteners sold for more than four times as much as granulated sugar. Furthermore, it was expected that consumers would eagerly purchase low-calorie prepared canned foods and beverages. A government advisory panel for the Food and Drug Administration (FDA) estimated in 1968 that 75 percent of 492

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the U.S. population consumed artificial sweeteners and that 70 percent of these sweeteners were used in soft drinks. At that time, about half a dozen companies were marketing brands of artificial sweeteners for table use, most of which contained cyclamates. Brand names of the sweetening products included Sugarcane 99, Crystal Sweet, Sweet’n Low, Sweetness & Light, Zero-Cal, and Sugarine. Diet soft drinks were sold under brand names such as Diet Pepsi, Fresca, Like, Tab, and Diet-Rite. As new food and pharmaceutical products are developed, the FDA must approve their distribution in the United States. Once products have been approved for distribution, researchers may continue to test them to better observe the physiological effects the products have on humans. Such research is often initiated when a group or organization suggests that there may be a potential hazard as a result of consumption. In 1958, an amendment to the Food and Drug Administration Act known as the Delaney Amendment was passed. It requires that food additives that are shown to cause cancer in either animals or humans be removed from the consumer market. Research concerning the effects of consumption of cyclamates occurred throughout the time they were marketed in the United States. Several preliminary research panels concurred that consumption of cyclamates was safe. In December, 1968, a government advisory panel, in a report to the FDA, concluded that no research warranted a reduction from the current recommended consumption limit of 5 grams (the equivalent of more than three quarts of artificially sweetened beverages) of cyclamates per day. The FDA responded with a more guarded recommendation to the public that research was ongoing and that, pending results, consumers should consume no more than 50 milligrams per day. The panel reported that according to soft drink labeling information, a 12-ounce can contained between 0.3 and 0.6 grams of cyclamates. Even one soft drink would exceed the lower recommended limit. In April, 1969, changes in labeling of products containing cyclamates were recommended by the FDA to allow consumers to more easily stay within the safe consumption levels. At that time, concern about safe intake levels was primarily in response to the knowledge that consuming more than 5 grams of cyclamates per day has a laxative effect on humans and to the results of laboratory experiments that had shown liver changes in animals that consumed cyclamates. Early in October, 1969, researchers hired by Abbott Laboratories, which manufactured more than half of all cyclamates sold in the United States, found possibly malignant tumors in rats that were fed high doses of cyclamates. This information was passed along to the Department of Health, Education, and Welfare (HEW) through reports from the National Cancer Institute and 493

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Abbott Laboratories. As a result of the reports and as advised by the National Academy of Sciences, Robert Finch announced on October 18 that cyclamates would be removed from U.S. markets. Impact of Event The immediate reaction to the ban by manufacturers of cyclamates and of foods and beverages containing cyclamates was surprise. Earlier in 1969, new products containing cyclamates had been introduced to the consumer market. Other products were continuing to be developed, and HEW statements had recently ruled cyclamates to be safe for consumption. Consumers responded with mixed reactions to the cyclamate ban. Some were concerned for their health and immediately wanted products without the controversial cyclamates. Others were concerned that they might not have low-calorie alternatives to their favorite products. As a result, many stores reported unusually heavy sales of cyclamate-containing products in the week immediately following the ban. Apparently, consumers stocked up on the items that they expected to be removed from supermarket shelves. The Royal Crown Cola company, producer of Diet-Rite, the leading diet soft drink in 1969, surveyed consumers to determine their reactions to the cyclamate issue. The results of the survey indicated that consumers were not concerned about their consumption of cyclamates even though they were aware of the controversy. Many retail stores chose to remove cyclamate-containing products before the February 1 deadline. Other stores left cyclamate products on the shelves but discontinued orders of new products. Most stores endured a slowdown in sales of diet products following the announcement of the ban. Producers of diet-plan beverages that were formulated and marketed as substitutes for traditional meals found an exemption from the ban by repackaging their products and distributing them through drugstores as prescription items. This move enabled them to avoid huge losses on their inventories. Diet soft drink manufacturers dealt with the transition to cyclamate-free products remarkably well. Fortunately for the manufacturers, the ban was announced in October, a traditionally slow sales and advertising period. Soft drinks are not produced very long in advance of distribution, so manufacturers were not hampered by large inventories that might become worthless. Fruit canners did not fare as well as soft drink producers, as they had just completed a seasonal pack when the ban was announced. Further, canners and jam producers generally had proportionately more diet products in their product mix than did soft drink producers. Manufacturers of diet-type canned fruits and vegetables successfully secured an extension in the 494

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phase-out time for cyclamates. They effectively extended the deadline to September 1, 1970. This extension enabled them to deplete most of the inventory that had been canned prior to the ban announcement. With the impending deadline for the ban of cyclamates quickly approaching, manufacturers of foods and beverages were eager to discover a cyclamate replacement that would save the market for their products. Soft drink manufacturers overwhelmingly switched from cyclamates to saccharin. Saccharin did not replicate the taste of sugar as well as did cyclamates. Saccharin also had the unfortunate drawback of a bitter aftertaste. A small amount of sugar could be added to a drink to squelch the bitter aftertaste, but this added approximately forty calories to the product. Manufacturers were concerned about the marketability of this substitute, afraid that consumers would not consider the reduction of a few calories to be enough of a benefit to purchase the diet drink and that consumers concerned about the effect of sugar on teeth would not be satisfied with the addition of sugar. Following the October announcement of the cyclamates ban, advertising was heavy among diet product producers, both those that used cyclamates and those that did not. Many products that were marketed as diet or sugar-free and never did use cyclamates increased their advertising for two reasons. First, they now had an advantage over the cyclamate-containing products. Second, their producers wanted to be certain that consumers knew that cyclamates were not used in the products. Although it is difficult to measure the effectiveness of advertising, it is clear that consumers responded favorably to new diet products that replaced those containing cyclamates. Saccharin had been produced since 1901. It became the sweetener of choice for diet products for more than two decades, until health risks similar to those earlier discovered for cyclamates were associated with it. Nutra Sweet emerged as the replacement of saccharin in the 1980’s. Because of the potential volume of sales and profits generated from diet foods and beverages, research targeting the physiological effects of currently consumed artificial sweetener and the development of new artificial sweeteners continues. Bibliography Burda, Joan M. An Overview of Federal Consumer Law. Chicago: American Bar Association, 1998. Practical guide prepared by the American Bar Association. Cohen, Stanley E. “Cyclamates Incident May Raise Some Questions for Government Marketers.” Advertising Age 40 (October 27, 1969): 107. Discusses controversial issues and the impact of the cyclamate ban on producers and policymakers. 495

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“Cyclamates: How Sweet It Isn’t. . .” Chemical Week 105 (October 29, 1969): 30-31. Discusses the economic impact of the cyclamate ban on producers of cyclamates. “Diet Industry Has a Hungry Look.” Business Week (October 25, 1969): 41-42. Discusses the impact of the cyclamate ban on producers of diet soft drinks and other diet foods. Donlon, Thomas B., and Kathryn Sederberg. “Food, Drink People React Swiftly to Cyclamate Ban: Ads May Increase.” Advertising Age 40 (October 27, 1969): 1. Discusses the impact on advertising resulting from the cyclamate ban. Specific companies’ strategies for new advertising are shared. Semling, H. V., Jr. “FDA Establishing Cyclamate Policy, Economic Woes Being Heard.” Food Processing 31 (April, 1970): 71-72. Highlights the new policy on cyclamates used for pharmaceutical products and the phase-out schedule for cyclamates in food products. The economic impact of the ban is discussed. Virginia Ann Paulins Cross-References Congress Passes the Pure Food and Drug Act (1906); Congress Sets Standards for Chemical Additives in Food (1958); Health Consciousness Creates Huge New Markets (1970’s).

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THE BANNING OF DDT SIGNALS NEW ENVIRONMENTAL AWARENESS The Banning of DD T Signals New EnvironmentalAw areness

Category of event: Consumer affairs Time: November 20, 1969 Locale: Washington, D.C. By banning the use of DDT, the United States took a first step in addressing environmental concerns relating to many products Principal personages: Rachel Carson (1907-1964), a marine biologist, the author of Silent Spring Paul Hermann Müller (1899-1965), the inventor of DDT William Longgood (1917), a Pulitzer Prize-winning journalist, author of The Poisons in Your Food Summary of Event In the spring of 1972, amid considerable controversy, the Environmental Protection Agency (EPA) banned dichloro-diphenyl-trichloroethane (DDT) for use as a pesticide in the United States. This followed a ban on use in residential areas issued by the federal government on November 20, 1969. The DDT ban had a far-reaching impact on humanity, the environment, and business. Widespread use of other toxic or dangerous pesticides, however, continued in the United States and elsewhere. DDT, which consists of chlorinated hydrocarbons or organochlorides, was acquired by the United States from Switzerland in 1942. It was discovered by Paul Hermann Müller, who won a Nobel Prize for the 497

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discovery. Prior to the discovery of DDT, there were hundreds of different pesticides in use. Many of these pesticides were effective on only one or a few pests. Some of the more infamous pesticides included Paris green, which contained arsenic but was extremely effective on potato bugs; lead arsenate, used to eliminate gypsy moth caterpillars; and calcium arsenate, used against cotton pests in the South. One problem associated with early pesticides was that they were often as dangerous to plants as they were to insects. DDT was an important discovery because insecticides that had been in use were scarce because of World War II. In addition, DDT was effective against a variety of insects, including lice and mosquitoes. It was discovered after the war that DDT also was effective against a number of agricultural pests that plagued American farm production and Americans in general. By 1960, DDT was a household word. Its use was so widespread that almost every person in the United States either had used the product or had heard of its use. It was partially because DDT was so well known that it was singled out for study by scientists who noticed irregularities in the environment. At this time, during the peak of DDT use, two books were written about pesticides and their impact on the environment. One of the books, Silent Spring (1962), written by marine biologist Rachel Carson, extensively outlined the effects of DDT on humans and on the environment. According to Carson, humans can become poisoned by DDT in a number of ways: by breathing the oily fumes that occur when it is sprayed, by ingesting food that has been sprayed with DDT, and by absorbing it through the skin. Because DDT is fat soluble, it is stored in organs rich in fatty substances such as the liver, the kidneys, and the adrenal and thyroid glands. DDT had been linked to cancer and blood disorders. DDT did not disseminate in the environment. Accumulations of DDT remained in the soil and continued to contaminate plants and insects. Birds or other animals that ate insects or animals contaminated by DDT died or passed the contamination on to other animals through the food chain. There were questions as to whether DDT poisoning could be passed from a mother to her child through mother’s milk and about a variety of illnesses that could result from DDT poisoning. Another significant book written during this time was The Poisons in Your Food (1960) by journalist William Longgood. It was an important work because it was the first major journalistic attack against pesticides. It caused the general public to become aware of the dangers of pesticides, outlining a number of toxic pesticides that had been used to restrict insects 498

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and promote agricultural growth. The book indicated that many poisons remained in food and were therefore consumed by human beings. Both these books stirred public interest in environmental concerns. That public concern led to the establishment in 1970 of the Environmental Protection Agency (EPA), whose purpose was to protect and improve the environment. The EPA was responsible for controlling pollution through standard setting, enforcement, and research in the areas of solid waste, toxic substances, radiation, and noise. One of the first acts of the EPA was to amend the Federal Insecticide, Fungicide, and Rodenticide Act of 1947 to restrict the use of DDT. The federal government had banned use of DDT in residential areas on November 20, 1969, and called for a virtual halt to its use by 1971. Other countries took similar action. The EPA issued a cancellation order on the use of DDT in January, 1971. The Department of Agriculture appealed the order. In October of 1971, the EPA held hearings to determine the nature of the hazards of DDT use or misuse and the nature of benefits of the use of DDT. The EPA tried to determine if harms to humans associated with DDT occurred because it was misused or necessarily resulted even with proper use. The harms of using DDT then had to be weighed against the benefits of its use. One of the benefits of its use was increased food production, particularly important for countries that were dense in population. Land had to be very productive to feed the people of such countries. The use of DDT also had eliminated hoards of mosquitoes, which had caused epidemic outbreaks of malaria, and it had eliminated lice infestations, which were responsible for numerous typhus epidemics. The EPA determined, however, that the harmful effects of DDT outweighed the benefits. If it remained in the environment for a long enough time, it could endanger a large number of people. DDT therefore was banned for use and production in the United States. European countries later followed suit. Impact of Event The banning of DDT in the United States and in Europe, along with hearings on pesticides and their use, alerted the public to the importance of environmental and ecological issues. The American public became involved by joining groups such as Greenpeace, the Sierra Club, the Audubon Society, the National Wildlife Federation, and the Wilderness Society. Membership in these groups soon numbered in the millions. These groups lobbied Congress to pass additional laws to protect the environment. Lobbying efforts soon resulted in legislation concerning clean air, water pollution, noise control, drinking water, and toxic substances. These acts identified pollutants and set standards for their release into the environment. 499

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Standards were meant to identify the levels at which certain pollutants would be dangerous to people or the environment and to restrict emissions to those levels or below. The standards focused on factories and sewage plants at first. Later, standards would be expanded to include all polluters. Compliance with the standards was expensive. The EPA forced many companies to develop new processes or products in order to conform to standards. For example, auto companies were forced to alter their auto emissions systems to include a part called a catalytic converter. Auto companies also were forced to design more fuel-efficient vehicles, since gasoline had been identified as a pollutant as well as a natural resource. These changes added an estimated $800 to the cost of each American car. Other companies were required to find alternative places to dump their refuse or to do research and development on alternate uses for refuse. Even biodegradable refuse and, under some conditions, clean but warm water were deemed harmful to the environment. Areas previously used as dump sites were discovered to contain toxic substances, and companies found to have used the sites were forced to pay to have these sites cleaned. During 1988, corporations paid an estimated $86 billion for pollution control, an amount equal to 2 percent of the Gross National Product. The Comprehensive Environmental Response, Compensation, and Liability Act was passed in 1980 in part to help firms pay the high costs of cleaning up old dump sites. Under this act, firms unable to pay to clean sites received assistance from the government, which had funds from petroleum and chemical production taxes set aside for this purpose. Business costs escalated in other ways, as firms were sued because of harm done to the environment. Hooker Chemical Company faced one such suit. When dangerous chemicals seeped from its barrels into the groundwater, people in a small community near Niagara Falls, New York, since called Love Canal, experienced increased rates of cancer, birth defects, and other illnesses. The costs of settling the resulting suit was in the billions of dollars. Costs continued to rise as other harmful or possibly harmful practices were identified. For American business, making a profit became complicated by concerns over environmental issues and possible future liabilities. Companies producing pesticides, for example, had to be concerned about the health and welfare of the populations of areas in which the pesticides were produced and used. The Food and Drug Administration (FDA) and the Environmental Protection Agency shared the responsibility for protecting the public from harmful substances in food. Manufacturers of pesticides and chemicals had to perform tests and prove the safety of their products as well as showing that residues did not accumulate beyond allowed levels. The FDA and EPA relied largely on tests conducted by the manufacturers 500

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themselves when registering pesticides. Consequently, some harmful pesticides, including Dieldrin, Diazinon, Malathion, and Lindane, remained in use. Pesticides by nature are harmful to at least some forms of life and may cause cancer, birth defects, or nerve damage in humans. Some chemicals have not been tested for possible harmful effects. During the Ronald Reagan Administration, testing all but halted. Concern mounted about pesticides such as alar in apples, heptachlor in dairy products, and ethylene dibromide (EDB) in muffin and cake mixes. The release of toxic fumes from a chemical plant in Bhopal, India, in 1984 served as an example of the potential deadliness of pesticides. Thousands of people were killed in their sleep by toxic pesticide fumes, and hundreds of thousands more were injured. The banning of DDT led to banning of other harmful substances in the United States and elsewhere. For countries with weaker economies or that are densely populated, the choice to restrict pesticides carried different costs and benefits. The risks of using harmful pesticides had to be balanced against the possibility of starvation or epidemic, and some countries could not afford the chemicals that could be used instead of those proved to be harmful. Pesticides will continue to be produced and used as long as insects continue to develop immunities to the chemicals being used. The challenges for business are to continue to balance pesticide use with other forms of pest control and to develop new safe and effective products. That concern with safety will also hold for wider environmental problems such as air and water pollution. Bibliography Beatty, Rita Gray. The DDT Myth. New York: John Day, 1973. Defends the use of DDT and refutes the findings of previous studies. Recounts studies of successful use. Includes tables comparing DDT to other sources of pollution and identifies some natural toxins found in the environment. Contains a selected list of references and an index. Carson, Rachel. Silent Spring. Boston: Houghton Mifflin, 1962. An indepth report on the results of early studies on the use of DDT and other dangerous chemicals. Outlines the dangers to the environment and to humans. Contains an index and an excellent list of principal sources. Duggleby, John. Pesticides. New York: Macmillan, 1990. This forty-fivepage hardcover book discusses what pesticides do, how to measure danger, and alternatives to pesticide use. Juvenile reading. Contains a section with addresses to write for further reading, a glossary of terms, and an index. Greer, Douglas E. “Environmental Protection.” In Business, Government, 501

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and Society. New York: Macmillan, 1993. This chapter in a textbook reviews the topic of environmental policies by asking relevant questions. Contains an appendix on clean air and a section of notes which contains lists for additional reading. Written for undergraduate students. Gunn, D. L., and J. G. R. Stevens. Pesticides and Human Welfare. Oxford, England; Oxford University Press, 1976. Presents a balanced opinion on the use of pesticides. Discusses the problems, strategies for use, and the legal environment up to 1975. Detailed appendix outlining terminology, reading lists at the end of each chapter. Mott, Lawrie, and Karen Snyder. Pesticide Alert: A Guide to Pesticides in Fruits and Vegetables. San Francisco: Sierra Club Books, 1987. This softcover manual discusses pesticide residues and federal regulation of pesticides. Lists several fruits and vegetables and pesticide uses for each. Intended for the adult reader, this manual contains notes, a section on sources of additional information, and further reading. Also contains a glossary, a bibliography, and an index. Taylor, Ron. Facts on Pesticides and Fertilizers in Farming. New York: Franklin Watts, 1990. Discusses pesticides and their uses in thirty-two pages. Contains four-color illustrations and color photos. An excellent and very brief introduction to ecology for the juvenile reader. Contains a glossary, an index, and a list of relevant addresses to write for additional information. Wharton, James. Before Silent Spring. Princeton, N.J.: Princeton University Press, 1974. Discusses recognition of insect problems and regulations in force prior to 1962. Also includes a history of pesticides and public health. Contains bibliographic notes by chapter and an index. Meant as a source of information for the adult reader. Elizabeth Gaydou Cross-References Congress Passes the Pure Food and Drug Act (1906); Congress Passes the Motor Vehicle Air Pollution Control Act (1965); Health Consciousness Creates Huge New Markets (1970’s); The Environmental Protection Agency Is Created (1970); The Three Mile Island Accident Prompts Reforms in Nuclear Power (1979).

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HEALTH CONSCIOUSNESS CREATES HUGE NEW MARKETS Health Consciousness Creates Huge New Markets

Category of event: Marketing Time: The 1970’s Locale: The United States Growing awareness of the importance of a healthy diet and exercise opened new markets among American consumers Principal personages: Adelle Davis (1904-1974), a biochemist and author of four books on nutrition Benjamin Gayelord Hauser (1895-1984), a nutritionist and chiropractor Carlton Fredericks (1910-1987), a psychiatrist and biochemist Linus Pauling (1901-1994), a biochemist and proponent of Vitamin C as a preventive medicine Rachel Carson (1907-1964), a marine biologist Ralph Nader (1934), a consumer advocate who wrote about the dangers of chemicals in food Summary of Event In the 1970’s, several health issues generated concern about nutrition and exercise. The pesticide DDT and cyclamates, an artificial sweetener, were banned in the United States in 1969. Other pesticides and food additives soon came under scrutiny. Doctors and researchers made news by linking cholesterol and heart attacks; findings showed that exercise could reduce cholesterol while strengthening the heart. People began to take up jogging; joggers then began buying clothing and shoes for their exercise. 503

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Manufacturers of athletic shoes touted specialized shoes for that form of exercise. The World Food Congress, sponsored by the United Nations Food and Agriculture Organization (FAO) at The Hague in June, 1970, brought together nations concerned with a host of problems including agricultura productivity and the purity of the environment. Addeke H. Boerma, director-general of the FAO, stated that it would be futile to discuss hunger and malnutrition in isolation from other related problems such as overpopulation. He believed that radical steps had to be taken to cure the entire problem as a whole; if such steps were not taken, the problems could result in outbreaks of violence. At this same conference, delegates expressed concern regarding new plant varieties that were the backbone of the green revolution and the large amounts of fertilizer, pesticides, herbicides, and irrigation required to grow these new plants. Chemical use would prove to be problematic in a monsoon country such as India, where such herbicides, fertilizers, and pesticides would be washed into the River Ganges and the Bay of Bengal, causing pollution of unpredictable magnitude. There was also fear for the oceans of the world, not only from pollutants that were meant to increase yields of food plants but also from future oil spills that could reduce another valuable food source, marine life. Meanwhile, these same concerns were being addressed by scientists in the United States and elsewhere. Numerous books were published on the subject of pesticides and herbicides as well as on the effect of food additives on the human body. Health-conscious biochemists such as Adelle Davis and Benjamin Gayelord Hauser wrote books about the benefits of pure food. James Trager stated in an article that three groups of people buy what had become known as health foods: people who have a desire for good food, people concerned about environmental decay brought on by persistent use of pesticides and herbicides, and people who believe that what they eat affects their health and well-being. Trager stated that in 1971 there were fifteen hundred to two thousand health food stores in the United States, adding a billion dollars a year to the economy. Davis stated that health food stores appealed to both the “establishment” and the “young, hip” generation. With a master’s degree in biochemistry from the University of Southern California, she had sold nearly two million copies of her books on the subject of pure food by 1970. With the rise in popularity of health food stores and growing awareness of the environment, farmers and ranchers took up organic farming, producing food without artificial fertilizers, pesticides, or herbicides. California growers in particular reflected the increase in interest in organic food. That state appeared to lead the U.S. movement toward health consciousness. 504

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Farmers there were among the first in the country to adopt organic methods on a large scale, and consumers swarmed to health food stores and embraced healthy food products. Furthermore, the California climate was conducive to year-round outdoor exercise. In 1970, organic food was found mostly in health food stores, small country stores, and through co-ops, groups of people that got together to order large amounts to take advantage of quantity discounts. The leaders of this movement were found mostly on the two coasts and in the Midwest in 1970. As of 1992, the amount of revenue generated by the sale of organic foods in the marketplace had grown to an estimated $1.4 billion dollars. In 1976, psychiatrist and biochemist Carlton Fredericks published a book, Psycho-Nutrition, in which he showed how diets planned on an individual basis could heal people with a wide variety of ailments ranging from simple allergies to chemical imbalances and schizophrenia. His appearances on television talk shows provided publicity for that book and his later publications. The buying public appeared to be willing to accept broad claims of the benefits of a proper diet. While the World Food Congress addressed problems raised by the new plant strains that began the green revolution, researchers continued to test new plant strains. They also rediscovered plant varieties that had fallen out of use. Examples include amaranth, and ancient Aztec grain with a buckwheat flavor; spelt, an ancient grain that first had its resurgence in Europe and then gained popularity in the United States; quinoa, a complete protein grain known as the Chilean mother grain, grown high in the Andes; and kamut, a grain brought to the United States from Egypt. Health food producers soon marketed these rediscovered grains in pasta form and in cereals. Health consciousness affected markets in addition to that for food. People became increasingly aware of the importance of exercise. Markets for athletic shoes, equipment, and clothing grew tremendously. As exercise gained in social status, equipment became a status symbol. Sweatsuits came out in glamorous lines and were worn by people who rarely exercised but wanted to give the appearance that they did. General-purpose gym shoes were replaced by shoes designed for specific forms of exercise. Jogging shoes proved to be particularly popular, even for people who never went jogging. Exercise equipment that found new markets ranged from rowing machines and stationary bicycles to large, multiuse home gyms. Sales of bicycles boomed. Later, mountain bikes would become popular, in part as a result of the increasing desire to escape urban life and get in touch with nature, at least temporarily. 505

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Athletic equipment and footwear took sophisticated turns in regard to comfort and utility. Wooden tennis rackets were replaced by ones made of metal and other materials, for example. Sophistication naturally came at a price, and innovators with new ideas reaped substantial profits. Consumers in many cases needed to be educated about healthy practices. Cookbooks and exercise books proliferated, as did periodicals. Vegetarian Times, for example, promoted the benefits of a diet without meat. Magazines also developed around the many newly popular participant sports.

One way in which consumers have sought to improve their diets has been finding ways to buy fresh food products closer to their sources of production. (PhotoDisc)

Impact of Event From health food stores to organic gardening and farming to the growth of interest in exercise, the entire health movement has proliferated since the 1970’s. Many of the new products and trends introduced in that decade became entrenched parts of the marketplace. Doctors recommend exercise to keep circulatory systems in good shape, and people discovered that they felt better as a result of exercise. The result was often an overall increase in fitness consciousness, with greater attention also paid to diet. Many people attracted to health consciousness in the 1970’s remained steady consumers of health-related products. By 1990, many of those early converts had passed their health consciousness on to their children, a new generation of consumers. 506

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Health consciousness extended into the field of health care itself. Consumers of medical care gradually became aware of alternatives to traditional Western medicine as it became more expensive and as the alternatives proved to be effective. The New England Journal of Medicine reported that by 1990, one-third of all Americans were using some form of alternative health treatment. These alternatives included relaxation techniques, spiritual healing, biofeedback, acupuncture, and herbal medicine. These alternative treatments accounted for $10.3 billion in expenditures in 1990, with insurance covering $2.4 billion of that total. Traditional physicians began to take notice of this trend and studied these alternatives. In 1992, the National Institutes of Health in Bethesda, Maryland, established an office for the study of unconventional medicine. Surveys on the sales of sporting goods show steady increases in sales. From 1980 to 1991, for example, the market for sporting goods as a whole grew from $16.7 billion to $45.1 billion. Sales of athletic clothing grew from $3.1 billion to $11.9 billion over the same period of time. Footwear sales, including shoes for jogging and running, tennis, aerobics, basketball, golf, and other sports, grew from $1.7 billion to $6.8 billion. Equipment sales nearly doubled, from $6.5 billion to $12.5 billion. Sales of bicycles and related supplies more than doubled, from $1.2 billion to $2.5 billion. Part of the increase in sales came from the increased sophistication of products. The large number of buyers made it feasible to develop new products, such as basketball shoes with air pumps. Buyers proved eager to try out each innovation, and prices of products skyrocketed. Sophisticated products became so popular that simpler products were crowded out of the market. Single-speed bicycles, for example, are almost impossible to find for adult riders. Athletes became conscious of the link between exercise and diet, partly as a result of the many books and articles published on the subject. Endurance athletes load up on carbohydrates before they begin strenuous activity and consume drinks containing electrolytes while they exercise. Backpackers carry food, often in the form of dried fruits and nuts, while on the trails. Organic foods increased in sales, but their market share remained small. In 1992, organic foods accounted for $1.4 billion in sales out of the approximately $200 billion for all farm products. Health consciousness created huge new markets in the United States and elsewhere in the industrialized world. Other parts of the world, however, still struggled with basic problems of food distribution, overpopulation, and the difficulties created by herbicides, pesticides, and fertilizers. These were the very problems that had, in part, spurred the movement toward health consciousness. 507

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Bibliography Detje, F. W. “Reform, Revolution, and Food.” Science News 98 (July 25, 1970): 86. Discusses concerns voiced by representatives attending the World Food Congress in 1970. These concerns included use of pesticides and herbicides and how Third World nations can avoid contamination when monsoon rains wash toxins into rivers. Eisenberg, David M., et al. “Alternative Medicine in the United States: Prevalence, Costs, and Patterns of Use.” The New England Journal of Medicine, January 28, 1993, 246. Gives statistics on use of alternative medicine. By 1990, one-third of all Americans were using some form of health treatment alternative such as relaxation techniques, spiritual healing, biofeedback, acupuncture, and herbal medicine. Americans spent $10.3 billion on these treatments; insurance covered $2.4 billion. Goldman, M. C. “Sharp Rise in Organic Food Demand.” Organic Gardening and Farming 17 (April, 1970): 66-70. Reports the rising interest in food produced without herbicides, pesticides, or fertilizers. Tells how farmers and ranchers successfully provided organic food. Jacobson, Michael F. The Complete Eater’s Digest and Nutrition Scoreboard. 1st ed., rev. and updated. Garden City, N.Y.: Anchor Press/Doubleday, 1985. A consumer’s fact book of food additives and healthful eating. A good source for understanding what is listed on food labels and how it may affect the consumer. Lansing, Elizabeth. “Image to Shed, More Food to Grow.” Life 69 (December 11, 1970): 52. Discusses how the organic gardening movement is growing and why. Also tells how families and other groups are succeeding with this enterprise. Trager, James. “Health Food: Why and Why Not.” Vogue 157 (January 1, 1971): 122-123+. Casts a somewhat skeptical eye at much of the health food movement. Covers extremes in the health food movement. Corinne Elliott Cross-References Congress Passes the Pure Food and Drug Act (1906); Congress Sets Standards for Chemical Additives in Food (1958); The United States Bans Cyclamates from Consumer Markets (1969); The Banning of DDT Signals New Environmental Awareness (1969); Bush Signs the Clean Air Act of 1990 (1990).

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THE U.S. GOVERNMENT REFORMS CHILD PRODUCT SAFETY LAWS The U.S . Government Reforms Child Product Safety Laws

Category of event: Consumer affairs Time: The 1970’s Locale: Washington, D.C. Federal legislation prevented the marketing of potentially harmful children’s products Principal personages: Edward M. Swartz (1934), an attorney, and child toy safety advocate Ralph Nader (1934), an attorney and consumer advocate Terrence Scanlon (1939), the chair of the Consumer Product Safety Commission James Florio (1937), the chairman of the House Reauthorization Subcommittee on Commerce, Consumer Protection, and Competitiveness Peggy Charren (1928), the founder of Action for Children’s Television Summary of Event During the 1970’s, the federal government of the United States undertook a concerted effort to improve the safety of toys and other products used by children. This effort was presaged by passage of the Child Protection Act of 1966, which prohibited sale of any hazardous substance that might cause harm to children, if it failed to display a warning label on either the product or its package. The Food and Drug Administration (FDA) was responsible for enforcing this act, which amended the Hazardous Substances Labeling 509

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Act of 1960. Prior to this act, signed into law on November 3, 1966, toy manufacturers were not held accountable for product safety or for reducing the risk of injuries sustained to children using their products. On November 6, 1969, the Child Protection and Toy Safety Act was passed, extending the requirements of manufacturers by prohibiting any toxic, corrosive, or flammable toy or article that could cause personal injury or illness to children. In addition, if a product could cause an electrical, fire, or mechanical hazard to children, a label was to be displayed on the product or its package warning of its potential danger. The law gave the secretary of health, education, and welfare the authority to ban what the FDA classified as a hazardous substance. The FDA was also responsible for carrying out the 1953 Flammable Fabrics Act, passed to ban highly inflammable nightgowns and children’s clothing that would burst into flame when exposed to open flames. Unfortunately, the standards were not stringent. For example, if a six-inch sample of a material was held at a 45 degree angle from a flame for one second and did not catch fire, it passed the test. If the material burned at a rate of five inches or less in three and one-half seconds, it passed the test. On October 27, 1972, the Consumer Product Safety Act established the Consumer Product Safety Commission (CPSC), which was empowered to develop safety standards for most consumer products other than food, drugs, and automobiles. The CPSC was charged with protecting the public against unreasonable risks of injury from consumer products, assisting consumers in evaluating the relative safety of competing product brands, reducing the conflicts between state and local regulations, and promoting research and investigation into the causes and prevention of product-related death, illness, and injury. Prior to the establishment of the CPSC, the toy industry regulated itself. In 1968, the National Commission on Product Safety (NCPS) found in its final report to the United States Congress that self-regulation by trade associations such as the Toy Manufacturers of America (TMA) and organizations that give seals of approval, such as Good Housekeeping, were ineffective. The TMA did not force its members to comply with its standards, and organizations such as Good Housekeeping were more concerned that advertising claims were truthful than with testing and certifying products’ safety to children. One toy safety advocate who testified before the NCPS was Edward M. Swartz, an attorney who represented several clients in court to obtain compensation for injuries suffered by their children as a result of playing with hazardous toys. At the 1968 NCPS hearings, Swartz demonstrated how dangerous toys could be to their child users. Swartz became an advocate on 510

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Among the important provisions of federal laws regulating the manufacture of children’s clothing are requirements that materials be fire retardant. (PhotoDisc)

toy safety issues and wrote several books, including Toys That Don’t Care (1971) and Toys That Kill (1986). Swartz’s research uncovered several unsafe products that were marketed in the 1970’s having not been found to be dangerous by the CPSC. One product was the Wham-O Manufacturing Company’s boomerang. Another unsafe product, marketed by PBI Incorporated, was a projectile toy that was advertised to the wholesale trade as a safe, flexible plastic toy, even though it had sharp edges and was potentially blinding. FAO Schwartz marketed a fiberglass bow and wooden arrow set. The wooden arrows had rubber tips, but they were removable. The toy was advertised as being harmless. During the 1970’s, the Ideal Toy Corporation made a “Kookie Kamera” that was marketed as nontoxic and not intended for internal consumption. The product caused several cases of nausea, which may have led to vomiting and even asphyxiation as a result of blockage of the trachea in small children. Another product, the Newman Company’s “Loonie Straw,” was designed to be reusable. The problem was that instructions called for the straw not to be washed in hot water. It was intended to be used to drink milk, making it probable that bacterial germs would be bred in the unsanitary straw. From 1973 to 1977, the CPSC received more than one hundred death certificates related to the ingestion of small objects. Forty-five of these 511

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deaths were related to toys and nursery products. In 1976, it was estimated by a CPSC study that 46,500 children under the age of ten were treated in hospital emergency rooms for injuries related to small parts. Twenty-five of forty-five deaths involving children’s products were of children less than three years old. During 1978, the CPSC received more than 180 oral and written comments from businesses, trade associations, and consumer groups regarding the safety of consumer products. In response, on August 7, 1978, the Consumer Product Safety Act tightened up safety regulations and required every manufacturer, distributor, or retailer who obtained information that a product either was unsafe or did not comply with the CPSC regulations to immediately inform the CPSC. Impact of Event The effects of regulation on how toys were manufactured and marketed were mixed. In 1980, the CPSC banned the sale of toys with small parts intended for children under the age of three if the parts could accidentally be swallowed or become dangerously lodged in their throats. By 1989, however, the CPSC still had not clearly defined what constituted a small part and if small-part toys should be banned in general. Toymakers still claimed that accidents being researched were isolated incidents; the CPSC concurred in most cases. On the other hand, many products were banned because of the CPSC’s enforcement of the Child Protection Act and Child Protection and Toy Safety Act. In the 1970’s, products called crackerballs were categorized as hazardous substances. Crackerballs consisted of small quantities of gunpowder and particles of sand or flint in papier-mâché coatings. When thrown against any hard surface, they would explode with a loud noise. Lawn dart sets were required to carry warning labels, and they could not be sold at toy stores. In 1977, the CPSC required bicycles to have capped brake wires, treads on the pedals to prevent foot slippage, and reflectors for night riding. One area of concern for product safety advocates was that under product safety laws, toy manufacturers were permitted to market products with labels recommending the age group for which the toy would be most suitable. The labels did not indicate that the toy would be hazardous to any child younger than the recommended age. As a result, many adults believed that the recommended age group was based on intellectual capacity or dexterity, not on safety standards. In 1977, Parker Brothers marketed a product called Rivitron, a plastic construction toy for children aged six to twelve. After an eight-year-old boy 512

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died from ingesting a small part of the toy, the CPSC found the death to be an isolated case. Parker Brothers added chemicals to the toy rivets, giving them a bad taste so that children would be deterred from putting the parts in their mouths. In 1987, the CPSC under Commissioner Terrence Scanlon seized goods valued at almost $4 million during spot checks. Seizures represented 1.5 million units of toys. James Florio, chairman of the House Reauthorization Subcommittee on Commerce, Consumer Protection, and Competitiveness, criticized the CPSC for being relatively weak during the 1980’s. Florio and his committee believed that confiscating $4 million worth of products from a $12 billion industry showed ineffectiveness as a safety commission. Many critics of toy manufacturers believed that the public was unaware of the dangers that children faced when playing with toys that were not being stringently monitored by the CPSC. On the other hand, toy manufacturers believed that regulations were too stringent and the public too demanding. They argued that many injuries to children were not caused by the children and their toys but by the lack of parental supervision. In 1968, Peggy Charren had founded Action for Children’s Television (ACT). Charren was a critic of toy-based programs, which she believed were exploiting children and should have been scrutinized by the television industry and the Federal Communications Commission. In 1987, when Mattel announced a line of gun toys to be used in interaction with a television show, she unsuccessfully tried to stop the marketing of these products, claiming that simulating the shooting of a television figure would give children the wrong impression of real shooting. Charren’s movement gave a new interpretation to product safety, expanding beyond physical features and taking into consideration the potential danger of marketing products that could lead to an unsafe situation or foster dangerous behavior. Toy manufacturers were faced with other criticisms that may have led to decreased sales. In 1987, consumer advocate and attorney Ralph Nader found that television advertising manipulated child viewers to buy toy products that were not safe. For example, Nader found that plastic toy parts were more hazardous than were wood products, but that television advertising focused on plastic toys. Toy manufacturers responded that critics were more concerned with an antibusiness philosophy than with objections to the actual safety of toys. Although the CPSC generally supported consumer advocates, in 1991 Toys “R” Us was permitted to sell wind-up dolls, even though children under three years of age could be injured by choking on some of the parts. Sale of the dolls was allowed because they were not intended for children of that age. Throughout the 1980’s and 1990’s, attorney Edward Swartz 513

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compiled lists of dangerous toys. Although many legal battles were won by the toy manufacturing industry, advocates such as Swartz, Nader, and Charren influenced the CPSC and the toy manufacturers to ensure that toys were safe. Toy manufacturers became more cognizant of their market and of the pressure that consumer advocates placed by lobbying legislators to strengthen product safety rules for children. Efforts that began in earnest in the 1970’s thus continued to bear fruit into the 1990’s, with effects sure to continue. Bibliography Dadd, Debra Lynn. Non-Toxic and Natural: How to Avoid Dangerous Everyday Products and Buy or Make Safe Ones. Los Angeles: Jeremy P. Tarcher, 1984. Designed to enable the selection of products that are nontoxic. Describes how to make safe products, choose brands that are safe, and pick products that will help protect the environment. A special section on toys describes the safest toys to purchase for young children. Office of the General Counsel, ed. Compilation of Statutes Administered by CPSC. Washington, D.C.: U.S. Consumer Product Safety Commission, 1998. Unofficial compilation of laws relating to the Consumer Product Safety Act assembled for consumer use. Indexed. Oppenheim, Joanne. Buy Me! Buy Me! New York: Pantheon Books, 1987. The first section describes the toy business as an industry and how it changed what children play with in the 1980’s. The second section lists toys that are appropriate and safe for children of various age groups. The third section is a directory listing the names and addresses of organizations and toy suppliers, enabling the reader to obtain further information on purchasing toys for children. Stern, Sydney Ladensohn, and Ted Schoenhaus. Toyland: The High Stakes Game of the Toy Industry. Chicago: Contemporary Books, 1990. A brief history of the toy industry, with a focus on the 1980’s. Gives an objective and reasonably unbiased account of the toy industry’s response to its customers from a safety perspective. Swartz, Edward M. Toys That Don’t Care. Boston: Gambit, 1971. Discusses the unsafe toys manufactured and purchased for children and what can be done to increase safety. Written by an attorney who is an advocate for safe toys. An excellent source, but written from a subjective viewpoint, that of a product liability and negligence trial attorney. _____. Toys That Kill. New York: Vintage Books, 1986. A sequel to Toys That Don’t Care. A history and list of unsafe toys manufactured in the 1970’s and 1980’s. An excellent source, but subjective. Martin J. Lecker 514

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Cross-References Congress Sets Standards for Chemical Additives in Food (1958); The United States Bans Cyclamates from Consumer Markets (1969); Nixon Signs the Consumer Product Safety Act (1972).

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AMTRAK TAKES OVER MOST U.S. INTERCITY TRAIN TRAFFIC Amtrak Takes Over Most U.S. Intercity Train Traffic

Categories of event: Transportation; government and business Time: 1970 Locale: Washington, D.C. New modes of transportation threatened railroads with extinction and forced the federal government to take radical measures to save them, including passing the Rail Passenger Service Act Principal personages: Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 John A. Volpe (1908-1994), the U.S. secretary of transportation under Nixon Roger Lewis (1912-1987), the first president of the Amtrak corporation Ronald Reagan (1911), the president of the United States, 19811989 Summary of Event When the U.S. Congress created Amtrak in 1970, it took one in a series of steps increasing government involvement in railroad transportation. Railroads had an important role in the development of the United States. Trains carried passengers and supplies to the frontier and brought back food, lumber, and minerals to the population centers of the East. The federal government encouraged the growth of railroads by giving their builders enormous land grants, including not only rights-of-way but millions of acres on both sides of the tracks. This land increased tremendously in value because of the presence of the railroad tracks. 516

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In the Midwest, railroads were responsible for the change from subsistence farming to the raising of single crops such as wheat and corn. In the West, ranchers were able to thrive because they had a means of shipping their cattle and sheep to major markets. California became a rich state in part because growers were able to ship fruits and vegetables to the eastern markets on rapid trains that had freight cars specially designed to prevent spoilage in transit. Cities such as New York and Chicago were able to grow to enormous proportions because trains brought in abundant food. The so-called “railroad barons” received their land grants and exclusive operating territories on the condition that they provide efficient and equitable transportation for both passengers and freight. When rapid growth of railroads took place in the nineteenth century, no one could foresee the changes in transportation that would be wrought by the Industrial Revolution and later technological and social developments. One of the earliest developments that threatened railroads was Henry Ford’s adoption in 1913 of assembly lines for mass production of his famous Model T automobiles. This innovation allowed the price of cars to fall dramatically, changing automobiles from toys of the rich to a practical means of transportation for the entire population and marking the beginning of the end of the golden era of passenger travel on railroads. Automobiles became an American passion. More women began driving as manufacturers competed by making their products more stylish and easier to handle. U.S. auto manufacturers began making annual style changes to encourage sales. Trade-ins of good used cars on new models made it possible for nearly every American to own some kind of car. Two-car families with two-car garages became a common part of the American scene. The demand for automobiles brought a demand for paved highways. State governments responded by creating more highways, and the attractive highways increased the demand for automobiles. In the 1960’s, under President Lyndon Johnson’s administration, the government spent billions of dollars on a nationwide system of superhighways. Along with automobiles came trucks and buses. Large long-haul diesel trucks encroached on the railroads’ freight business, while buses encroached on the railroads’ passenger business. Buses of the Greyhound line in particular became a common sight across the nation. Cars, trucks, and buses, not being confined to steel rails, could take people anywhere they wanted to go. As a result, the entire American landscape changed. New towns and cities sprang up that were not dependent on any linkage to railroad tracks. At the end of World War II came the worst blow of all to the railroads’ passenger business. The federal government was eager to encourage the 517

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growth of airlines for many reasons. For one thing, the business of manufacturing airplanes had long been an important asset to the American economy. The federal government helped to encourage air transportation by setting strict safety standards through the Civil Aeronautics Board. There were plenty of pilots to fly these planes, because the government had trained thousands of men to be aviators during World War II. These experienced pilots provided safe, reliable service that helped to build the public image of air travel. Flying a passenger plane was easy for men who had flown bombing raids over Germany and Japan. In spite of dramatic air crashes that sometimes killed hundreds of passengers, the public came to realize that, statistically speaking, air travel was the safest form available. The incredible savings in time made air travel hard to ignore. It took the fastest trains three full days to carry a load of passengers from Los Angeles to New York, while an airliner could make the same trip in a few hours. A business traveler could zoom from San Francisco to Los Angeles in one hour, while the same trip could easily take ten hours by car, covering four hundred miles of highways. Trains were subject to long delays because of weather conditions, but airliners could avoid most adverse weather by flying above the clouds. Younger people, especially business travelers, abandoned train travel, and it became apparent that train clientele increasingly consisted of elderly people who were afraid of flying and had plenty of time on their hands. Eventually, only one-third of 1 percent of Americans traveling between cities used trains. By the mid-1950’s, 85 to 90 percent of the total passenger traffic in the United States went by automobile. The volume of traffic on interstate highways connecting America’s cities illustrated that trains could no longer handle the endless stream of humanity hurtling along in private automobiles. The basic problem was that railroads had become outmoded as a means of human transportation. Railroad companies, however, had obtained their rights-of-way from the government on the basis of a commitment to provide public transportation. Passenger traffic now not only caused the railroads to lose money but also interfered with the profitable transportation of freight. Freight trains had to be shunted off to sidings to stand idle while passenger trains that were half empty sped by. One possible solution was to build separate lines for passenger trains, but this was so obviously unprofitable that no railroad company considered such an investment. President Richard M. Nixon supported the idea of government subsidization of passenger trains and was influential in the creation of Amtrak, the official nickname for the National Railroad Passenger Corporation, created by the Rail Passenger Service Act of 1970. Amtrak soon took over virtually 518

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all intercity passenger train service, although the semi-independent corporation was not involved in rail commuter service. Amtrak management eliminated many famous old passenger trains and cut down service to approximately 240 trains each day serving about 500 stations over 23,000 miles of tracks. Even with radical cost cutting, Amtrak continued to lose money, and there were periodic outcries to stop wasting taxpayers’ money on an obsolete form of transportation and to let passenger trains pass into history, along with stagecoaches and riverboats. Impact of Event Many American railroad corporations were in desperate financial straits by 1970. The federal government was forced to subsidize them to prevent a complete collapse of rail transportation. Amtrak brought immediate relief. Freed from the duty of running passenger trains full of empty seats, the railroads were able to concentrate on hauling freight, the business that brought them profits. The railroads were able to cash in on mushrooming international trade by providing “land bridges” across America. Japan, the largest exporting nation in the world, found that it was relatively inexpensive and fast to send cargo ships to ports in Seattle, San Francisco, and Los Angeles, where cargoes could be off-loaded onto flatcars and whizzed across the continent to ports such as New York, Baltimore, and Atlanta. The cargoes would then proceed to Europe, Africa, and the Middle East. The alternative was to send ships thousands of miles on circuitous routes around the Cape of Magellan or through the Panama Canal to reach their final destinations. New methods of transporting freight were developed to adapt to changing conditions of international trade. The most innovative idea was containerization. Instead of being packaged in whatever form manufacturers chose, manufactured goods came to be customarily packed in huge, standard-size, all-metal containers that are weatherproof and tamper-proof. Freight no longer had to be slowly loaded into the holds of freighters in small parcels that had to be carefully placed but instead could be piled quickly. The containers were easy to tie down and easy to load and unload with winches. When they reached American ports, the containers could be quickly unloaded onto ordinary railroad flatcars. Huge “doublestack” freight trains requiring minimal crews became a familiar sight. Containerization was bitterly fought by labor organizations representing stevedores and other cargo ship employees. Unions obtained some concessions for their senior members but had to accept the loss of many jobs. Amtrak did not provide much help for train travelers. Service continued to deteriorate under the new federally subsidized corporation. Many busi519

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ness leaders, government officials, economists, and journalists agreed that long-distance passenger trains were nothing but a form of amusement, like the trains at Disneyland. The only passenger trains that were needed were those providing commuter service over relatively short distances, and these did not need government support. The dominant modes of transportation between cities continued to be planes and automobiles. With the coaches and Pullman cars getting older and shabbier, the wonderful dining cars of the past being replaced by canteen cars serving packaged food, and the rails themselves deteriorating so that passengers were sometimes badly shaken, the incentive to travel by train decreased. Older people who could remember the glory days of train travel were dying or traveling less frequently. In the light of these developments, President Ronald Reagan, faced with huge budget problems, called for the breakup of Amtrak and the destruction of the remaining intercity passenger trains. Long-distance train travel managed to continue because of political pressure; some of the most famous surviving trains passed through states represented by influential United States senators. The future of Amtrak remained uncertain. It continued to operate passenger trains between major cities and acquired badly needed new equipment to provide greater speed and comfort. It became obvious that trains were not an efficient means of transporting people in a vast country such as the United States. American travelers valued their time too greatly and became accustomed to the convenience and speed of travel by automobile and airline. Passenger trains continued to exist primarily because some people were afraid to fly, because some nostalgia buffs favored them for aesthetic reasons, and because some politicians continued to fight for them for their own political advantage. Intercity passenger trains likely will remain part of the American scene, especially in areas of exceptional scenic beauty and areas of high population density, such as the Northeast Corridor between Boston and Washington, D.C. The passenger train, however, can never hope to recapture more than a fraction of its former glory. Bibliography Frailey, Fred W. Zephyrs, Chiefs, and Other Orphans: The First Five Years of Amtrak. Godfrey, Ill.: RPC Publications, 1977. A detailed study of the first five years of Amtrak’s operations, attempting to determine which trains were attracting passenger business and which were operating at a loss, and why. Frailey, who is nostalgic about the golden years of train travel, is critical of management and government. Contains many facts and figures. Illustrated with photos of Amtrak trains. 520

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Hilton, George W. Amtrak: The National Railroad Passenger Corporation. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1980. Hilton, a professor of economics at the University of California, Los Angeles, describes the decline of passenger traffic and blames railroad management for deliberately discouraging passenger travel by downgrading the quality of service. Concludes that Amtrak serves no useful function but subsidizes people who enjoy traveling by train. Predicts that Amtrak will eventually pass out of existence. Itzkoff, Donald M. Off the Track: The Decline of the Intercity Passenger Train in the United States. Westport, Conn.: Greenwood Press, 1985. Itzkoff concludes that the glamour of railroad travel has vanished forever. He is pessimistic about the future of Amtrak. Extensively footnoted and supplemented with an excellent bibliography. Contains photographs of interiors and exteriors of great passenger trains of the past. Kidder, Tracy. “Trains in Trouble.” The Atlantic 238 (August, 1976): 29-39. A survey of the American passenger trains operating under Amtrak. Explains the factors leading to the gradual deterioration of passenger service and discusses possible hope for rail travel revival because of increasing congestion on highways and freeways. Lyon, Peter. To Hell in a Day Coach: An Exasperated Look at American Railroads. Philadelphia: J. B. Lippincott, 1968. An amusing and informative history of American railroads from their beginnings up until the time when it became obvious that the federal government was going to have to take drastic action to preserve passenger service. Lyon blames the railroads for sabotaging their passenger service in favor of the more lucrative freight business. Orenstein, Jeffrey. United States Railroad Policy: Uncle Sam at the Throttle. Chicago: Nelson-Hall, 1990. An explanation and evaluation of U.S. public policy toward American railroads by a political scientist. Presents an overview of the history of American railroading. Discusses Amtrak in considerable detail and offers recommendations for improving government’s subsidization and supervision of the nation’s railroads. Pindell, Terry. Making Tracks: An American Rail Odyssey. New York: Grove Weidenfeld, 1990. Pindell is a passenger train enthusiast and recounts the history of America’s great passenger lines. He spent most of 1988 riding all twenty-one Amtrak routes, covering thirty thousand miles and visiting all but three states. He is a staunch advocate of preserving and improving passenger train service through Amtrak. Bill Delaney

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Cross-References Ford Implements Assembly Line Production (1913); The Railway Labor Act Provides for Mediation of Labor Disputes (1926); The DC-3 Opens a New Era of Commercial Air Travel (1936); Truman Orders the Seizure of Railways (1946); Carter Signs the Airline Deregulation Act (1978).

522

THE U.S. GOVERNMENT BANS CIGARETTE ADS ON BROADCAST MEDIA The U.S . Government Bans Cigaret te Ads on BroadcastMedia

Category of event: Advertising Time: April 1, 1970 Locale: Washington, D.C. As of January 1, 1971, cigarette advertising was banned from the American broadcast media Principal personages: Luther Terry (1911-1985), the United States surgeon general in 1962; formed the Advisory Committee on Smoking and Health Frank E. Moss (1911), the chair of the Senate Commerce Committee hearings on the effects of smoking Joseph Cullman III (1912), the chair of Philip Morris and spokesperson for tobacco manufacturers at the Senate Consumer Subcommittee hearings Wallace Bennett (1898-1993), the U.S. senator who introduced the bill that required health warning labels on cigarette packages beginning in 1965 John F. Banzhaf III (1940), the executive director of Action on Smoking and Health, an antismoking public interest group Summary of Event The Public Health Cigarette Smoking Act of 1969 banned cigarette advertising from American radio and television beginning January 1, 1971. It also allowed the Federal Trade Commission (FTC) to consider warnings in printed advertising after July 1, 1971. Warnings on cigarette packages were changed, and under the act, the FTC was required to give Congress 523

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six months notice of any pending changes in rules concerning cigarettes. The legislation was signed by President Richard Nixon on April 1, 1970. After passage of the act, two voluntary agreements were reached between the FTC and cigarette manufacturers. The companies agreed to list tar and nicotine content in their advertising and also agreed to feature the health warning label in print advertising. Pressure to curb cigarette advertising originated with a 1939 study that for the first time scientifically linked smoking with lung cancer. Between 1950 and 1954, fourteen major studies linked cigarette smoking with specific serious diseases. In response to these studies, cigarette manufacturers created the Tobacco Industry Research Committee, a lobby group to fund research on the use and health effects of tobacco. The group later changed its name to the Council for Tobacco Research—USA. In 1957, the Legal and Monetary Affairs Subcommittee of the House Government Operations Committee held six days of congressional hearings, with John A. Blatnik as the chair. As a result of these hearings, Senator Wallace Bennett introduced a bill that would require cigarette packs to carry warning labels, and Senator Richard Neuberger proposed removing tobacco from the list of crops that qualify for agricultural price supports. Five years later, in 1962, Surgeon General Luther Terry formed the Advisory Committee on Smoking and Health. Two years later, on January 11, 1964, the surgeon general announced the results of that committee’s findings. The press conference to announce the results was held on a Saturday in anticipation of the adverse effect the study might have on the stock prices of tobacco companies. The study established a link between cigarette smoking and diseases ranging from lung cancer to cardiovascular diseases and cirrhosis of the liver. Two weeks later, the Public Health Service announced its acceptance, in full, of the Advisory Committee’s report. In subsequent weeks, several congressmen introduced legislation related to the controversy and called for hearings. On March 16, 1964, three days of Federal Trade Commission hearings on cigarette labeling and advertising rules began. A proposed rule had been circulated in advance. One section required that a health warning appear in all advertising and on cigarette packages. Drafts of two warning statements were presented, each indicating that cigarette smoking can lead to death. Another section of the rule attempted to ban “words, pictures, symbols, sounds, devices or demonstrations . . . that would lead the public to believe cigarette smoking promotes good health or physical well-being.” The FTC was overruled by Congress on part of its proposal. Warnings were to be required only on packages, not in advertising, according to the Cigarette Labeling Act of 1965. The ban on radio and television advertising 524

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came later, by an act of Congress, not through the FTC or the Federal Communications Commission (FCC). The required inclusion of the health warning on all print advertisements also came later. This was the result of a voluntary agreement between the commission and cigarette manufacturers in 1972, when a congressional ban on commission action forcing this requirement was expiring. The ruling requiring warning labels was to take effect on January 1, 1965. In the nine-month period between the commission’s hearings and the first of January, the cigarette industry mobilized. Within one month of the hearings, the industry announced the creation of a voluntary code, intended to signify to Congress and the public that the industry was interested in regulating itself and that the FTC was an obstacle to self-regulation. Robert B. Meyner, a former governor of New Jersey, was hired to administer the code and given the authority to issue fines of up to $100,000 to violators. Essentially, the code prohibited advertising aimed at persons under twentyone years of age and prohibited cigarette advertising from making positive health claims. The code limitations were difficult to interpret and enforce. These difficulties eventually led to an agreement that eventually banned cigarette advertising from the broadcast media. The agreement was prompted by the pending expiration on July 1, 1969, of the Cigarette Labeling Act of 1965. The Federal Communications Commission unexpectedly announced in February, 1969, that if Congress allowed the 1965 act to expire, the FCC would propose a rule that would ban cigarette advertising from the airwaves. At this point, several options were available. If Congress did not act and allowed the 1965 legislation to expire, this would permit the FCC to enact its proposed restrictions. Alternatively, Congress could have extended the 1965 ban or could have taken action on the health warning label, making it more or less stringent. Antismoking forces hoped that Congress would not act, thereby allowing for the more encompassing regulations proposed by the FCC. Instead, the House Interstate and Foreign Commerce Committee held thirteen days of hearings two months before the ban was to expire. The arguments and many of the witnesses were the same as those heard in the 1965 hearings. In testimony before the House Commerce Committee, Warren Braren, former manager of the New York office of the Code Authority, made it clear that the National Association of Broadcasters (NAB) deliberately misled Congress and the public into believing that voluntary industry self-regulation in reducing youth appeal was meaningful. He revealed that television networks and advertising agencies regularly overruled Code Authority staff members in interpretation of standards. The Code Authority operated entirely on voluntary 525

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submissions by advertising agencies. Some tobacco sponsors simply had not subscribed to the code, and those that did made their own judgments on whether their commercials needed to be reviewed. The bill that passed the House of Representatives on June 18, 1969, however, appeared to represent a victory for the cigarette industry. It prohibited the states permanently, and the federal agencies for six more years, from enacting regulations on cigarette advertising, in exchange for a strengthened package warning label. The bill as passed by the House, however, sparked a severe backlash in the Senate and at the state level as well as in the private sector. The New York Times, for example, announced that it would require a health warning in any cigarette advertisement appearing in that newspaper. The Senate Commerce Committee, chaired by Frank E. Moss, held a one-day hearing, with only five witnesses appearing. Speaking for the tobacco manufacturers in July, 1969, Joseph Cullman III, chairman of Philip Morris, told the Senate Consumer Subcommittee that the industry was ready to end all advertising on television and radio on December 31, 1969, if the broadcasters would cooperate, and in any event would agree to cease advertising by September, 1970, when existing agreements expired. The announcement by Cullman caught many broadcasters by surprise. They had proposed to phase out cigarette ads over a three-year period beginning in January, 1970. Cigarette advertising accounted for $225 million a year in revenue to broadcasters, and they had hoped that a gradual reduction would help in the development of contingency plans to recover a portion of the lost revenue. Meanwhile, the National Association of Broadcasters (NAB) Television and Radio Code Review Boards announced a plan on July 8, 1969, to stop advertising on radio and television beginning January 1, 1970. In addition, cigarette manufacturers were required to continue carrying warning labels on their packages. The agreement stipulated that member stations of the NAB would phase out cigarette commercials on the air beginning January 1, 1970. The Review Boards also said that they would prohibit cigarette commercials during or adjacent to any program that was primarily directed at youth and would further study ways to reduce the appeal of cigarettes to minors. The announcement amounted to a victory for critics of tobacco, most notably the FCC, which had threatened to ban all cigarette commercials from the airwaves. The tobacco industry, in presenting its proposal, showed concern that broadcasters might sue for antitrust violations, on the grounds that the cigarette companies had acted in collusion. The industry included a request for antitrust protection in presenting its proposal. 526

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The bill that emerged from Congress on March 19, 1970, called the Public Health Cigarette Smoking Act of 1969, banned cigarette advertising from radio and television beginning January 1, 1971. It also agreed to allow the FTC to consider warnings in printed advertising after July 1, 1971. Cigarette package warning labels were changed to: “Warning: The Surgeon General Has Determined that Cigarette Smoking Is Dangerous to Your Health.” Impact of Event Attitudes within the tobacco industry regarding the ban were mixed. It is commonly assumed in the industry that advertising does not increase the size of the overall cigarette market. Instead, it affects the competitive position of the various brands. The primary effect of the advertising ban, therefore, would be to freeze the market shares currently held by each of the brands. Print ads could still affect market share but were not believed to be as powerful. The money saved by not producing and placing advertising in the broadcast media would be substantial. As an added bonus, the industry hoped that a cessation of cigarette advertising would yield a respite in the growing volume of antismoking advertising. It was expected that the industry’s decision to discontinue expensive television campaigns would be accompanied by stepped-up spending on print advertising, coupons, and contests. The chairman of American Brands predicted that “the battleground for cigarette sales advertising will probably switch to other media.” Newspaper and magazine publishers, unlike broadcasters, are not federally licensed and are protected by the First Amendment’s freedom-of-speech provision. There was no indication that publishers would voluntarily ban cigarette advertising, since it amounted to approximately $50 million in annual revenue. Furthermore, there was less pressure to ban print advertising of cigarettes, since these ads primarily reached an adult audience and were less intrusive than television ads. Opinions varied on how cigarette sales would be affected by a ban on broadcast advertising. In Great Britain, where cigarette ads were banned from television in 1965, sales initially fell but then recovered to reach record levels. In the United States, per capita cigarette sales had begun declining in 1968. This decline had been attributed in part to a drop in the number of new, young smokers. This market segment had become increasingly concerned about the health threats of smoking. That concern resulted in part from antismoking advertisements that the television networks were required to run, free of charge, after passage of the 1967 Fairness Doctrine. The tobacco industry’s initial response to the broadcast advertising ban was to find alternative means to get its message to the public. Liggett & 527

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Myers, Philip Morris, and R. J. Reynolds all signed contracts with automobile racing organizations as a way to keep their brands on television, announcing that the races would be named after popular brands, for example the “L&M Continental Championship,” the “Marlboro Championship,” and the “Winston 500.” Some industry observers saw this as an attempt at a “rear door” reentry by cigarette makers into the television market. Advertisers also positioned displays strategically at racetracks so that they would be captured by television cameras covering the events. Within one month of the imposed ban on broadcast media advertising, the number of pages of cigarette advertising in consumer magazines more than doubled as compared to the same period of the previous year. Although some increase was anticipated, its magnitude caught the magazine industry by surprise and created a controversy. This stemmed from the impression that the increase in cigarette advertising might convey in the light of the magazine industry’s somewhat delicate position regarding health warnings. Congress had barred the Federal Trade Commission from requiring health hazard warnings in cigarette print ads before July 1, 1971, but not after. Twenty months after the broadcast advertising ban went into effect, the FTC urged the government to buy broadcast time for antismoking advertising. Smoking had hit record high levels since the ads left the airwaves. In 1972, a total of 554 billion cigarettes were smoked, 3 percent more than in the preceding year. The tobacco industry apparently had survived the controversy that began with the 1964 surgeon general’s report. Analysts correctly predicted that the industry would witness at least a decade of strong, steady growth. Some attributed this growth to the increase in the 25-to-44 age bracket, a group that accounted for a large proportion of cigarette consumption. Others argued that the ban had not yet had its full effect, since most young consumers had seen cigarette ads for most of their lives. John F. Banzhaf III, executive director of Action on Smoking and Health, an antismoking public interest group, stated that to date the greatest impact of the ruling was that antismoking messages were appearing far less frequently, since broadcasters no longer had to air them for free to balance cigarette ads. The effects of cigarette advertising were seen to be long term, while the antismoking ads seemed to have an effect for a shorter period. In the 1970’s, public and medical research interest turned to the effects of smoking on nonsmokers. In 1972, the surgeon general issued the first report suggesting that secondhand smoke was dangerous to nonsmokers. In 1975, Minnesota passed the first state law requiring businesses, restaurants, and other institutions to establish nonsmoking areas. The concern regarding secondhand smoke continued, with an increasing number of local governments and businesses restricting smoking in public areas. 528

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The cigarette industry continued to target new generations of smokers. Through print and billboard advertising, sales promotions, public relations, and giveaways, the industry continued to aggressively promote its brands. In 1988, tobacco companies spent more than one billion dollars on advertising and more than two billion dollars on promotion. The restriction on broadcast advertising and the required warning labels on packages and advertisements appear to have had a limited impact in the face of advertising that promises smokers increased status, social acceptance, and glamour. The cigarette industry has defended itself against charges of irresponsibility by claiming that individuals are free to decide whether to smoke and that it simply is meeting an existing consumer demand. The industry is particularly defensive regarding charges that ads are targeted toward children. It argues that ads do not encourage people to start smoking, but rather to switch brands. Bibliography Doron, Gideon. The Smoking Paradox: Public Regulation in the Cigarette Industry. Cambridge, Mass.: Abt Books, 1979. Provides a succinct overview of the conflicting interests at the center of the debate regarding cigarette smoking. Fritschler, A. Lee. Smoking and Politics: Policymaking and the Federal Bureaucracy. 3d ed. Englewood Cliffs, N.J.: Prentice-Hall, 1983. A comprehensive review of the debate and negotiations that surrounded the decision to ban cigarette advertising from television and radio. Provides an insightful summary of the political maneuvering that accompanied the decision. Sobel, Robert. They Satisfy: The Cigarette in American Life. New York: Anchor Press, 1978. An extensive history of the tobacco industry and its changing economics, with a dispassionate account of the political struggle regarding cigarette advertising. Tollison, Robert D., ed. Smoking and Society: Toward a More Balanced Assessment. Lexington, Mass.: Lexington Books, 1986. Presents an assessment of the debate regarding cigarettes from the standpoint of its impact on society. Does not directly review legal aspects, but provides a collection of articles that provide essential background information. White, Larry C. Merchants of Death: The American Tobacco Industry. New York: Beech Tree Books, 1988. A somewhat biased presentation (as evidenced by its title) that provides a readable account of the techniques that tobacco companies have used to market their brands. Elaine Sherman

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Cross-References Congress Passes the Pure Food and Drug Act (1906); Station KDKA Introduces Commercial Radio Broadcasting (1920); The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Congress Establishes the Federal Communications Commission (1934); Cable Television Rises to Challenge Network Television (mid-1990’s).

530

CONGRESS PASSES THE RICO ACT Congress Passes the RICO Act

Category of event: Business practices Time: October 15, 1970 Locale: Washington, D.C. Congress passed the Racketeer Influenced and Corrupt Organizations Act to fight organized crime, but it was used most prominently to prosecute white-collar criminals Principal personages: G. Robert Blakey (1936), an attorney who drafted the RICO Act Rudolph Giuliani(1944), the prosecutor most famous for using RICO Carl Icahn (1936), a prominent takeover artist who was one of the first to be threatened with RICO indictments Michael Milken (1946), a powerful investment banker who was Giuliani’s chief target William Rehnquist (1924), the Chief Justice of the United States who criticized prosecutors for using RICO in ways not intended by Congress Summary of Event In 1970, Congress wound up debates on what appeared to be a simple piece of legislation but actually, as the financial community would learn, was quite complex. Signed into law on October 15, it became known as the Racketeer Influenced and Corrupt Organizations (RICO) Act. The origin of the name was evocative, since its intended target was organized crime. The measure’s history stretched as far back as the Senate investigations of organized crime in 1950. These investigations demonstrated strikingly, through testimony by underworld figures, that legitimate businesses had 531

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been infiltrated by criminal elements. Congress considered legislation to prevent this infiltration and a few weak statutes actually were passed, but the problem remained. In 1967, a presidential commission recommended a stiff new law to deal with the issue. Discussions that followed culminated in the 1970 debates. G. Robert Blakey, who as a Senate committee counsel in 1969 drafted the bill that became the RICO Act, later claimed that the resulting law would make fair the fight between legitimate businesses and the twin Goliaths of organized crime and white-collar crime. Almost all the legislators debating the issue, however, indicated that the primary objective was to provide penalties for gangster elements. Senator Robert Dole (R-Kansas) said that it was impossible to put too much stress on the importance of the legislative attack on organized crime. White-collar crime received little attention. Even so, the term “organized crime” did not appear in the final version of the law, partly in deference to the sensibilities of the Italian American community. Representative Mario Biaggi (D-New York) was vocal on this score, as were others. Some members of Congress doubted that a precise definition of organized crime was possible. Instead, the term employed was “racketeering activities,” defined to include a pattern of racketeering activity or the collection of an unlawful debt as well as the establishment or operation of any illegal enterprise engaged in, or the activities of which affect, interstate or foreign commerce. Also included were “acts or threats of murder, kidnapping, gambling, arson, robbery, bribery, extortion, or dealing in narcotics or other dangerous drugs.” In addition, counterfeiting, embezzlement from pension and welfare funds, extortionate credit transactions, obstruction of criminal investigations, and certain dealings with labor unions fell under the racketeering label. All of this was expected, since all of these activities were within the purview of criminal elements. The acronym for the law, RICO, came into question. One account is that the name was inspired by the character played by Edward G. Robinson in the 1930 film Little Caesar, Rico Bendello. Apparently no connection was meant to be made to the Italian American community. Mail fraud also came under the strictures of the new act, as did fraud in the sale of securities and the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States. The context makes it clear that the target of the law was individuals and groups collectively known as organized crime. Activities falling under the rubric of white-collar crime were not intended to come under the RICO statute. One of the few moments of levity 532

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during the debates on the bill came from a congressman who voiced objection to the measure on the basis that whatever the original motives of lawmakers, the courts would be flooded with cases involving all kinds of things not intended to be covered. The law already was recognized to have the potential for overreaching by zealous prosecutors. For example, the congressman suggested, suppose several members of Congress played poker for money on a regular basis. Would this mean that they had been running an organized gambling business and could get twenty-year prison sentences? Could the federal government also confiscate the pot? Subsection (a) of section 1962, which deals with prohibited activities, contains a laundry list of illegal activities. Securities activities are mentioned in this section. The act regulates the disposition of income that comes, directly or indirectly, from a pattern of racketeering activity or through collection of an unlawful debt in which a person has participated as a principal. That income, or the proceeds of such income, cannot be used to invest, directly or indirectly, in the acquisition of any interest in, or the operation of, any enterprise engaged in interstate or foreign commerce or any enterprise that affects interstate or foreign commerce. The purchase of securities with such income is not necessarily illegal. Securities purchases made in the open market for purposes of investment and without the intention of controlling or participating in the control of the issuer of the securities are not unlawful. Securities purchases would be lawful if the holdings (after the purchase) of the purchaser, the members of his or her immediate family, and any accomplices in any pattern of racketeering activity or the collection of an unlawful debt come to less than 1 percent of the outstanding securities of any single class; further, these holdings cannot confer, either in law or in fact, the power to elect one or more directors of the issuer of the securities. The penalties for RICO violations were severe. Even if a business were run legitimately, it could be confiscated if it had been purchased with illegally obtained money, and in civil cases treble damages could be levied. Funds and assets could be seized even prior to any trial; suspected criminals thus could be punished before their guilt was assessed. The penalties were so severe that even as the law was passed, some attorneys doubted its constitutionality. RICO’s defenders replied that such measures were needed to ferret out money obtained from “mob” activities. The RICO Act provided for both civil and criminal prosecution when an enterprise engaged in two or more predicate acts within a ten-year period that involved interstate commerce. Under terms of the legislation, even two acts within this time period would constitute a pattern of racketeering activity. 533

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There is debate as to whether legislators considered targets for the law other than “mob” activity and organized crime. Definitions included in the measure describe racketeering activity as including “any offense involving . . . fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States.” The context indicates that the legislators meant to address organized crime specifically, not the more common white-collar variety. The wording of the law, however, provided opportunities for energetic and imaginative prosecutors to bring cases outside the scope of organized crime. The initial cases under RICO did involve criminal activities undertaken by career criminals. That was the public’s understanding of the purpose of the law. As late as 1980, a reporter wrote, RICO stands for the Racketeer Influenced and Corrupt Organizations statute, a federal law enacted in 1970 that gave the government a powerful new weapon in its fight against organized crime’s takeover of legitimate businesses. . . . The idea, as the Justice Department put it in a training memo to its lawyers and agents, is “to hit organized crime in the pocketbook.”

Impact of Event Contained in the law were provisions for civil cases, which were used mostly against financial operators. It took time for this use of RICO to become widespread and gain acceptance. There was only one decision involving “civil RICO” in 1972, and only one other case before 1975. Only nine decisions were reported before the 1980’s. It was then that matters changed. As New York federal judge Gerard Goettel noted, virtually any fraud case or even a commercial case with overtones of fraud might qualify as racketeering, since use of the mail and telephones brought illegal activity under the definition of racketeering. One of the first uses of civil RICO in the securities industry came in 1982, when financier and takeover artist Carl Icahn was attempting to raid the Marshall Field organization, in his biggest attempted takeover up to that time. Attorneys for the large department store alleged violations of securities law in Icahn’s strategy and also invoked RICO provisions, charging that Icahn had obtained some of the funds for the raid from a “pattern of racketeering.” This pattern was evidenced by a consent order from the New Jersey Bureau of Securities, a New York Stock Exchange censure, four fines from the Chicago Board Options Exchange, and other minor charges. Nothing came of this, as Marshall Field entered into a merger with Batus, and the matter was dropped. 534

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Of the approximately 270 trial court decisions before 1985, 3 percent were decided before 1980, 2 percent in 1980, 7 percent in 1981, 13 percent in 1982, 33 percent in 1983, and 43 percent in 1984. Of this number, 57 involved securities transactions. These fell into three categories: brokers providing false information to clients to encourage trading, the “churning” of client accounts (engaging in excessive trading as a means of generating commissions), and issuing prospectuses with misrepresentations. For example, a client sued Harris, Upham after a broker with that firm told him of a pending takeover of a furniture warehouse chain; the takeover rumor was false. The client’s total losses from acting on it came to $2.6 million. In 1985, activity related to RICO prosecutions picked up, as prosecutors and litigators fixed upon the law as a superb instrument to terrify businesspeople. This new activity did not sit well with many disparate organizations. The American Civil Liberties Union, the National Association of Manufacturers, and the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), among others, objected to the uses to which the law was put. The law and its use also had critics in the legal profession. Chief Justice of the United States William Rehnquist told a Brookings Institution seminar in April, 1989, that civil RICO was being used in ways that Congress never intended, implying that its constitutionality might be tested and found wanting. In two of the most important cases to be heard by the Supreme Court, however, the Court did not strike down civil RICO prosecutions. A majority in both cases instead threw the matter back to the legislature. RICO may have been a poorly drafted statute, it concluded, but rewriting was a job for Congress, not the courts. Four justices pronounced the wording of the law unconstitutionally ambiguous. Casting about for means to thwart corporate raiders, target companies started turning to civil RICO. There was talk of using RICO against T. Boone Pickens during the contest for control of Unocal, but nothing materialized. In 1986, officials at the Staley corporation spoke of “extortion” and “bribery,” and two parts of its complaint dealt with racketeering activity. The most important use of RICO, however, was made by Rudolph Giuliani, the U.S. attorney for the Southern District of New York who in the late 1980’s led the campaign against Wall Street malefactors. In 1988, he invoked RICO against the investment bank of Princeton/Newport. The prosecution destroyed that company, though it later was found innocent of wrongdoing. Government seizure of assets played a large part in destroying Princeton/Newport. Giuliani’s biggest attack was against the investment bank of Drexel Burnham Lambert and its star banker, Michael Milken. 535

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Threatened with RICO action, Drexel agreed to pay $650 million in fines and restitution and to place Milken on a leave of absence. To some, this penalty seemed to be overkill, since the slightest doubt of Drexel’s ability to remain in business would, in effect, force it out of business. Ultimately, Drexel did file for bankruptcy in 1990. It was the biggest casualty of RICO, though probably one of the last, because the law was used only sparingly thereafter. Bibliography Bailey, Fenton. Fall from Grace: The Untold Story of Michael Milken. Secaucus, N.J.: Carol Publishing Group, 1992. Contains a harsh criticism of RICO and an analysis of its use. Bailey is a British journalist who had access to Drexel files. Bruck, Connie. The Predators’ Ball. New York: Simon & Schuster, 1988. An early exposé of Drexel and Milken, generally supportive of the use of RICO. Bruck gained entry to Drexel, and this book is the result of investigative journalism. Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. New York: Morrow, 1992. Written with Milken’s cooperation, this is a highly personal pro-Milken and anti-Giuliani account of the demise of Drexel Burnham Lambert and the incarceration of Milken. Kornbluth concentrates on the human side of the story and demonstrates only a slight knowledge of RICO. Sobel, Robert. Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken. New York: J. Wiley & Sons, 1993. Contains an account of the passage of the RICO statute and analysis of how it was used. Valuable for insights into the early and later views of how RICO should be employed. Stewart, James. Den of Thieves. New York: Simon & Schuster, 1991. Stewart is generally sympathetic to RICO and believes its use was justified in certain criminal and civil cases. Stewart was an editor of The Wall Street Journal with ties to Giuliani. Robert Sobel Cross-References The U.S. Stock Market Crashes on Black Tuesday (1929); Insider Trading Scandals Mar the Emerging Junk Bond Market (1986); The U.S. Stock Market Crashes on 1987’s “Black Monday” (1987); Drexel and Michael Milken Are Charged with Insider Trading (1988); Dow Jones Adds Microsoft and Intel (1999).

536

CONGRESS PASSES THE FAIR CREDIT REPORTING ACT Congress Passes the Fair Credit Reporting Act

Categories of event: Finance and consumer affairs Time: October 26, 1970 Locale: Washington, D.C. The Fair Credit Reporting Act caused policies to be implemented to ensure the proper maintenance and disclosure of credit information Principal personages: William Proxmire (1915), a senator from Wisconsin Richard H. Lehman (1948), a congressman from California Alan J. Dixon (1927), a senator from Illinois Alan Cranston (1914), a senator from California Esteban Edward Torres (1930), a congressman from California Summary of Event The Fair Credit Reporting Act (an amendment to the Consumer Credit Protection Act of 1968), was passed by Congress on October 26, 1970, and became law in April of 1971. Senator William Proxmire of Wisconsin was instrumental in the passage of this legislation. Section 602 of the Fair Credit Reporting Act (FCRA) outlined the need for this law. First, the banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence essential to the continued functioning of the banking system. Second, elaborate mechanisms exist to investigate and evaluate creditworthiness, credit standing, credit capacity, character, and general reputation of consumers. Consumer reporting agencies have assumed a 537

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vital role in assembling and evaluating consumer credit and other information on consumers. There is a need to ensure that consumer reporting agencies exercise their responsibilities with fairness, impartiality, and a respect for consumers’ right to privacy. The FCRA had four primary objectives. They were to establish acceptable purposes for which a consumer credit report may be obtained; to define the consumer’s rights regarding credit reports, with particular emphasis on giving consumers access to their reports and procedures for correcting inaccurate information; to establish requirements for handling an adverse credit decision that resulted in whole or in part from information contained in a credit report; and to define the responsibilities of credit reporting agencies. In general, it was the realization by Congress that consumer credit has had major impacts on economic activity as a whole that spurred the legislation. Consumers’ inability to obtain credit for expensive items such as automobiles and large appliances negatively affected economic factors such as employment, production, and income, ultimately magnifying the business cycle, particularly in downturns. Financial institutions, as the grantors of consumer credit and the users of information supplied by credit reporting agencies, weighted their credit decisions heavily on the information supplied. Timely, accurate, and intelligible information was necessary for proper credit decisions. Consumers also needed to be protected from ramifications resulting from inaccurate, untimely, or improper credit information. Consumers by far were the most heavily affected by the passage of this legislation. Consumers rely heavily upon consumer credit as a means of purchasing expensive items and raising their standards of living by purchasing goods for current use with future income. Reporting agencies faced higher costs as a result of the legislation but gained a greater reputation for accuracy and usefulness. The following information is usually contained within a consumer credit file: name; address; previous address; Social Security number; date of birth; employer; length of employment; previous employment; credit history including creditors, balances, and payment patterns; and public filings such as mortgages, chattels, marriages, divorces, collections suits, and bankruptcies. The FCRA made all information within a consumer’s credit report accessible to the consumer. Consumers can get access to their credit files in several ways. If a consumer is denied credit on a credit application, the lending institution is required to mail a detailed letter outlining the reasons for denial and including the name, address, and telephone number of any reporting agency 538

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consulted. The consumer may take this letter to the reporting agency within thirty days of the date of the letter to discuss and obtain a free copy of the report. A consumer who has not been denied credit may obtain a copy of his or her file from the local reporting service for a nominal fee. A consumer must provide proper identification in order to obtain a copy of his or her credit file. The FCRA identifies the type of material available to the consumer. The consumer has the right to know all the information in the file, with the exception of medical records. This includes names of people or companies that have obtained the report within the past six months and the names of those who received the report for employment purposes within the past two years. The FCRA greatly benefits consumers by allowing them to dispute information contained within their files. Erroneous or inaccurate information can be contested and asked to be verified by the reporting agency. The consumer has the right to place within the credit file a consumer statement outlining his or her interpretation of negative information. This statement is then part of the file and is presented to future users. The consumer statement is usually limited to one hundred words. The FCRA limits the amount of time that unfavorable information can be reported on a consumer. Seven years is the maximum, with the exception of bankruptcies, which are reported for ten years. In some instances, an investigative credit report may be compiled on an individual. It includes all the information mentioned above. In addition, it includes information on the character, reputation, and living style of the consumer. This information is obtained from interviews with friends, associates, and neighbors. The consumer has the same rights of access to this report as to an ordinary credit file. The final major area that the FCRA addresses is consumers’ right to privacy. Credit information is basically for use by the consumer, the reporting agency, authorized credit grantors, employers, and insurance companies. To restrict dissemination to proper users, those who request credit information must prove their identity and their reason for wanting access to a consumer’s credit file. For users who obtain information under false pretenses, the law provides for fines of up to $5,000, prison sentences up to one year, or both. The same penalties apply to officers and employees of reporting agencies who misuse information. Consumers are allowed to pursue civil litigation against reporting agencies and are entitled to compensation for any financial injury, extra penalties imposed by the court, court costs, and attorney fees. Consumers can discuss complaints with credit reporting agencies by contacting the Federal Trade Commission.

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Impact of Event Consumers were not the only parties affected by the FCRA. Reporting agencies assumed a more clearly defined fiduciary responsibility to act in good faith and trust. Their goals are to maintain timely and accurate files on consumers, handle disputes in a timely manner, and investigate complaints and inaccurate information on consumers. They must also ensure the confidentiality of their information while still making it available to the proper users. Failure to follow proper procedures and guidelines can result not only in consumer complaints but also in lawsuits, fines, or even imprisonment for employees of reporting agencies. Consumer credit grantors also were affected by the FCRA. Lenders need to be careful when disclosing credit information. It must be both timely and accurate. Letters denying credit must be sent out on time, and procedures need to be in place to handle direct requests made to the organization. Lenders need to be careful with outside requests so as to not be viewed as credit reporting agencies. The final area lenders must address is the use of information for decision-making purposes. Many lenders place great weight in consumer credit decisions on the information obtained from credit files. It is essential that lenders have reliable information in order to make proper credit decisions. Lenders also use credit reporting agencies to screen borrowers. This works in two ways for lenders. It improves their credit quality by eliminating marginal borrowers and also gives them access to potential new customers. Lenders are bound by privacy laws and are forbidden to give copies of reports to consumers or other lenders. The FCRA had major ramifications for consumers applying for credit, credit reporting agencies, and lenders who relied upon information for decision-making purposes. The emphasis of this act was that information contained within a credit file must be timely and accurate, accessible to all concerned parties, and inaccessible to unconcerned parties. The FCRA and subsequent amendments dealt with these issues. On September 13, 1989, the United States House of Representatives Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finances, and Urban Affairs met to discuss multiple concerns regarding the FCRA. Chairman Richard H. Lehman summarized the concerns. He stated that the act had existed essentially without amendment for nearly twenty years and that the credit reporting industry apparently had been successful in convincing Congress that it worked well in its present form. He noted, however, that people had concerns about privacy and other aspects of their rights under the act. There had been complaints about the difficulty of getting inaccurate information removed from credit files, the length of time to get disputed information reinvestigated, name mix-ups, 540

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and denials of credit being based upon the number of inquiries in a credit report. He also noted that Vice President Dan Quayle had had his credit report made available with what appeared to be insufficient checks by the credit reporter of the purpose intended. Finally, Lehman noted that $104 billion in consumer installment credit was outstanding when the act was passed. By 1989, that figure had reached approximately $700 billion. On October 22, 1991, the United States Senate Subcommittee on Consumer and Regulatory Affairs conducted hearings on the FCRA. In his opening statement, chairman Alan J. Dixon expressed reasons for the hearing. Consumer credit had increased sixfold since the act was first introduced, and the number of reports had increased fivefold. A revolution in computer technology had changed not only the shape of the credit reporting industry but also methods of record keeping and dissemination of consumer data. Witnesses at the hearing were asked to comment on credit report inaccuracies, complaints about errors and obsolete information, consumer access to reports and knowledge of rights, privacy issues and prescreening, enforcement of the FCRA, and credit repair organizations. At this hearing, Senator Alan Cranston of California noted that he had introduced to the Senate a companion bill to legislation in the House of Representatives proposed by Richard H. Lehman. Cranston’s bill proposed education of consumers about the credit reporting process, greater protection of privacy rights, and response to the massive changes in information technology and business credit needs. The meeting was concluded with the members of the subcommittee assuring Dixon that they were looking forward to passing the necessary amendments to the FCRA. On October 24, 1991, the United States House of Representatives Subcommittee on Consumer Affairs and Coinage met to discuss the FCRA. Chairman Esteban Edward Torres conducted the hearings. The primary purpose of the meeting was to overview legislation (H.R. 3596) introduced earlier in the week by the chairman to reform the FCRA. His legislation addressed problems primarily pertaining to lack of privacy induced by the use of computer technology, the rampant inaccuracy of information contained within credit reports, and the imbalance of power between business credit grantors and consumers. After much debate and testimony, Torres concluded the meeting by stating that it appeared that reform was essential. He ended by stressing the impacts these injustices had upon many Americans, particularly consumers. The FCRA was passed, and later amended, to enhance the proper maintenance and use of consumer information for credit, employment, and other related purposes. It outlines the responsibilities for all parties involved in the granting of consumer credit. In its inception in the early 1970’s, it 541

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dealt with relatively small volumes of information and limited technology. In the late 1980’s, the amount of information and technology had increased to the point where the original intentions of the law were compromised. This led Congress to hold many hearings and pass amendments to the original law to bring it back into compliance with its original intentions. Bibliography Beares, Paul. “Regulation of Consumer Credit.” In Consumer Lending. Washington, D.C.: American Bankers Association, 1987. An excellent book dealing with all phases of consumer credit. Written from a banker’s perspective, but easy reading for the layperson. Discusses in detail the process of granting consumer credit. This chapter in particular focuses on legislation and regulation. Cole, Robert H. “Regulation of Consumer Credit.” In Consumer and Commercial Credit Management. 8th ed. Homewood, Ill.: Irwin, 1988. This chapter discusses consumer credit regulation in detail. Chapter 9 in the same volume details the operations of credit reporting agencies. U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. Subcommittee on Consumer Affairs and Coinage. Fair Credit Reporting Act: Hearing. 101st Congress, 1st session, 1989. Hearings discussing problems, loopholes, and noncompliance by credit reporting agencies. U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. Subcommittee on Consumer Affairs and Coinage. Fair Credit Reporting Act: Hearing. 102d Congress, 1st session, 1991. Hearings discussing pending legislation designed to modernize and amend the FCRA. Discussions include abuses and reclarifications of the intended purpose of the original act. U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. Subcommittee on Consumer Affairs and Coinage. Give Yourself Credit (Guide to Consumer Credit Laws). 102d Congress, 2d session, 1992. A detailed guide covering consumer credit regulations. Uses a questionand-answer approach. Written in everyday language. Actual consumer situations are included. Chapter 5, “Your Credit File,” is directly applicable to this article. U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs. Subcommittee on Consumer and Regulatory Affairs. Fair Credit Reporting Act: Hearing. 102d Congress, 1st session, 1991. Senate hearings and testimonials relating to proposed amendments prompted primarily by the explosive growth of consumer credit, in conjunction with implementation of computer technology as a means of managing credit information. William C. Ward III 542

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Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); Congress Passes the Consumer Credit Protection Act (1968); Congress Prohibits Discrimination in the Granting of Credit (1975); Congress Deregulates Banks and Savings and Loans (1980-1982); Bush Responds to the Savings and Loan Crisis (1989).

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THE ENVIRONMENTAL PROTECTION AGENCY IS CREATED The Environmental Protection Agency Is Created

Categories of event: Government and business; consumer affairs Time: December 2, 1970 Locale: Washington, D.C. A large consensus on the need to consolidate the many programs designed to protect the environment led Congress to approve President Nixon’s proposal to create the Environmental Protection Agency Principal personages: Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 John D. Dingell (1926), a congressman Russell E. Train (1920), the chair of the Council on Environmental Quality Roy L. Ash (1918), the chairman of the President’s Advisory Council on Executive Organization Parke C. Brinkley, the president of the National Agricultural Chemicals Association Summary of Event The nature and extent of governmental involvement in setting environmental policy was dramatically changed by two nearly concurrent developments. First, the passage of the National Environmental Policy Act of 1969 established the President’s Council on Environmental Quality (CEQ). The second development was initiated on July 9, 1970, when President Richard M. Nixon forwarded a plan to Congress to create an independent Environmental Protection Agency (EPA). The plan required consolidation of sev544

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eral programs from the Interior Department (for example, water quality administration and pesticide research programs), the Department of Health, Education, and Welfare (for example, air pollution control and solid waste management), the Department of Agriculture (for example, pesticide registration, licensing, and monitoring functions), the Federal Radiation Council (for example, setting of radiation standards), and the CEQ (for example, ecological research). Subsequent congressional hearings and floor debates led to the formal endorsement of President Nixon’s plan. Hearings were conducted under the auspices of the House Government Operations Subcommittee on Executive and Legislative Reorganization and the Senate Government Operations Subcommittee on Executive Reorganization and Government Research. Individuals providing supportive testimonies included Russell E. Train, the chairman of the CEQ, Roy L. Ash, the chairman of the President’s Advisory Council on Executive Organization, and Parke C. Brinkley, the president of the National Agricultural Chemicals Association. Train stressed that the EPA would contribute to the effectiveness of efforts to reduce pollution. He indicated that its authority would stem from previously enacted legislation such as the Clean Air Act; the Federal Water Pollution Control Act; the Solid Waste Disposal Act of 1965; the Federal Insecticides, Fungicide, and Rodenticide Act, and the Atomic Energy Act. Additional authority would come from selected administrative units such as the Council on Environmental Quality, the National Air Pollution Control Administration, the Federal Water Quality Administration, and the Bureau of Sports Fisheries and Wildlife. Ash testified that the programs for combating pollution were spread across several agencies at that time and that this fragmentation did not serve the public interest. He envisaged that the EPA would have a 1971 budget of $1.4 billion and approximately six thousand people on staff. He also indicated the following EPA objectives with regard to pollution control: to conduct research and to set standards, to formulate coordinated policy, to recognize new environmental problems as they arise and develop new programs to address them, to integrate pollution control and enforcement, to simplify tasks of state and local governments, and to clarify the responsibility of private industry. Other testimony focused on the advantages to industry and to Congress of dealing with only one agency on pollution control matters. The House Government Operations Committee endorsed Nixon’s reorganization plan on September 23, 1970. Although most House members favored the plan, John D. Dingell (D-Michigan) contended that the new EPA could be a source of new delays and wastes rather than enhancing the effectiveness of pollution control efforts. He criticized the plan because it 545

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excluded water and sewer programs in the domain of the Department of Agriculture and the Department of Housing and Urban Development as well as the environmental programs of the Defense and Transportation departments. He sought establishment of a cabinet-level Department of Environmental Quality instead of the proposed EPA. The House eventually endorsed the plan by defeating a veto resolution opposing the creation of the EPA. In the Senate, the Government Operations Committee presented a report expressing its endorsement for the establishment of the EPA. The reorganization plan became effective on December 2, 1970. Impact of Event The EPA has been forced to cope with enormous performance expectations. The agency was created at a time of popular dissatisfaction with earlier attempts at pollution control. Responding to demands from the electorate for effective efforts to protect the environment, Congress passed several legislative measures that were ambitious in scope and that served to heighten expectations of what the EPA should deliver. In addition, the EPA’s considerable authority stemmed from a legislative mandate to establish and administer standards for industry aimed at protecting the environment in the United States. In a report titled Research and Development in the Environmental Protection Agency, the Environmental Research Assessment Committee of the National Research Council elegantly summarized the far-reaching scope and importance of effective environmental policy for industry. The report noted that once agents have been released into the environment as by-products of production, natural processes acting on them can cause changes in the quality of the ambient environment. These changes have potentially adverse consequences for human health and welfare, weather and climate, managed and natural ecosystems, and the use of resources for alternative purposes. Because environmental protection is a multifaceted and complex topic, it is difficult to assess the risks and costs associated with any decision or policy. Such assessments often are confounded by value judgments (for example, the tradeoff between “necessary” economic progress and “acceptable” environmental damage), conflicting viewpoints (for example, the differing agendas of industry and environmental groups), and a genuine lack of knowledge (for example, uncertainty over the thresholds of exposure to substances likely to harm human beings, and a clear understanding of the causal links between the intensity and duration of environmental pollution and societal costs such as birth defects, poor health, and premature deaths). Decisions and actions of the EPA thus were fated to become the subject of debate. 546

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An objective appraisal of the EPA’s decision-making impact should consider the benefits directly attributable to the agency and the costs at which they were achieved. The EPA claimed that emissions of lead, carbon monoxide, and sulfur oxides respectively fell by 97 percent, 41 percent, and 25 percent between 1970 and 1990. Although these benefits appear impressive, they can be attributed in part to factors largely unrelated to environmental regulation. Cost implications furCreation of the Environmental Protection Agency was ther undermine the benefits one of the lasting achievements of Richard R. Nixon’s presidency. (White House Historical Society) associated with EPA regulations. The EPA grew into a massive bureaucracy several times larger than its size at inception. In 1992, it accounted for an operating budget of $4.5 billion and a staff of eighteen thousand. The EPA itself estimated that compliance with its regulations cost Americans $115 billion in 1990, or an annual pollution control cost of $450 per person per year. That figure was a remarkable 2.1 percent of the country’s gross national product. That figure was higher than corresponding percentages for most Western European countries and was more than twice the 0.9 percent of GNP spent by the United States in 1972. Furthermore, the EPA’s 1992 budget represented one-third of the entire annual spending on federal regulatory bodies. The burgeoning cost estimates focus attention on value judgments associated with lives saved as a direct consequence of EPA regulations. Some studies show that the cost of saving one life through EPA regulations ranges from $100 million to as much as $5.7 trillion. More generous estimates of the number of lives saved lower this cost. EPA critics such as John Goodman of the National Center for Policy Analysis have questioned the wisdom of incurring such astounding costs, noting that regulating for health is a policy at war with itself, since the reduction of living standards associated with increased regulatory costs will cause additional deaths. Even if the 547

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EPA’s claims regarding lives saved were accurate, the price paid to save one life through environmental regulation could cover the cost of many other lives at risk from other causes, such as malnutrition. Businesses have often exploited environmental politics and policies to hurt competitors or to discourage new competition. Ethanol manufacturers, for example, formed a strategic alliance with environmentalists to hurt the oil industry. This alliance influenced the 1990 amendments to the Clean Air Act in a manner designed to enhance demand for their alternative fuel. Many businesses share the view that the EPA possesses sweeping and potent authority that can unreasonably restrict their operations. This view has some merit. Federal agencies usually have either broad authority covering virtually all industries or focused power that deeply affects operations of specific industries. In contrast, the powers of the EPA are unparalleled in both breadth and depth. Nevertheless, some aspects of environmental pollution are less amenable to direct EPA control than others. Although the EPA derives its authority from several congressional statutes focused either on protecting the environment or on protecting the public against health hazards, the agency does not carry unlimited powers to achieve statutory goals. On the contrary, the EPA is constrained by procedures and limitations that may not be consistent across statutes. As one illustration, the Clean Air Act states that the EPA’s decisions concerning ambient air quality should not focus on economic or technical considerations but on protection of public health. In contrast, under the Federal Environmental Pesticide Control Act, the EPA cannot cancel the registration of a pesticide because it poses an unreasonable risk to the public unless the impact of cancellation on economic factors such as prices of agricultural commodities and retail food prices have been considered. The political ramifications of environmental policy decisions are formidable. Political realities may inhibit EPA regulatory actions even if they are essential from a public interest standpoint, and even if they are mandated by law. Often, EPA policy is influenced heavily by extraneous considerations such as the likelihood of legal challenges. Because almost four out of five EPA decisions are litigated, it appears that environmental policy is shaped more by court orders and settlement negotiations than by EPA directives. For example, one area that has witnessed controversy and litigation involves the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980, more widely known as Superfund. Essentially, Superfund is a large trust fund, financed through tax dollars and levies on petroleum and certain chemical products, that the EPA utilizes to clean up toxic spills and hazardous waste sites. The law also empowers the EPA to pursue parties responsible for these environmental hazards and to 548

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get them to reimburse the fund for cleanup costs. This has led to much resentment, because in some cases the parties held responsible were only tenuously linked to the object of the cleanups for which they were forced to pay. Additional constraints on the EPA are imposed by Congress, through the large number of committees that supervise EPA activities, and the White House, through control over key appointments and budgetary oversight through the Office of Management and Budget. Taken together, the preceding political factors may have significantly undermined the effectiveness of U.S. environmental policy. Some policy regulations overtly subordinate environmental protection goals to political feasibility. For example, EPA regulations discourage the replacement of old plants by holding them to lower pollution standards than new plants. This may be irrational both economically and environmentally, but it is politically essential. Key functions of the EPA include establishing standards to control and safeguard the environment and conducting research that contributes meaningfully to environmental decision-making. These tasks pose special challenges. First, establishing standards is a difficult undertaking given the enormous imbalance between the current level of knowledge and the amount of work that remains to be done. Of the approximately seventy thousand chemicals in the EPA Toxic Substances Control Inventory in the early 1990’s, information concerning health implications was available for only ninety-six hundred. Second, although the EPA’s research should aim to provide scientific bases for environmental decision-making, such research is not likely to be perceived as objective by the regulated parties. Given the high frequency of litigation in environmental matters, the EPA is likely to draw on findings from EPA-initiated research programs to bolster its arguments in an adversarial legal setting. Unfortunately, the validity of sound EPA-initiated research may appear suspect because the EPA is a participant in a litigated, adversarial regulation process. Other evidence suggests that the bulk of available environmental research and knowledge may not be effectively used by the EPA for decisionmaking purposes. The Environmental Research Assessment Committee reported in 1977 that environmental research and development is actively pursued by many agencies other than the EPA, including the departments of Agriculture; Commerce; Health, Education, and Welfare; and Interior. The National Science Foundation and the Energy Research and Development Administration are among the other agencies that contribute. Although most of these research efforts could help decision-making at the EPA, the report found detailed information on the efforts lacking. In summary, environmental regulation is an extremely vital and complex 549

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area. Enforcing environmental policies often constrains industrial operations; therefore, businesses usually resist or oppose EPA directives via judicial means. Environmental regulation is also an enormously costly enterprise. Because of pervasive value judgments in this area, it is not surprising that some people advocate the abolition of the EPA, calling for a replacement with another system based on common law and torts. Others see the effect of the EPA as beneficial. Bibliography Brimelow, Peter, and Leslie Spencer. “Should We Abolish the EPA?” Forbes (September 14, 1992): 432-443. Evaluates common law and torts as an alternative to the bureaucratic approach for tackling environmental problems. _____. “You Can’t Get There from Here.” Forbes (July 6, 1992): 59-64. An informative performance assessment of the EPA. Analyzes the complexity of environmental legislation, focuses on cost/benefit factors, and critically appraises the EPA’s bureaucratic approach to solving pollution problems. Committee on Environmental Decision Making. Decision Making in the Environmental Protection Agency. Washington, D.C.: National Academy of Sciences, 1977. A useful assessment of the EPA’s decisionmaking framework. Environmental Research Assessment Committee. Research and Development in the Environmental Protection Agency. Washington, D.C.: National Academy of Sciences, 1977. A detailed and insightful account of the EPA’s research policies and practices. Washington Environmental Research Center. Managing the Environment. Washington, D.C.: U.S. Government Printing Office, 1973. Although dated, this source contains informative articles on a variety of environmental management topics. Siva Balasubramanian Cross-References Congress Passes the Motor Vehicle Air Pollution Control Act (1965); The Banning of DDT Signals New Environmental Awareness (1969); The Three Mile Island Accident Prompts Reforms in Nuclear Power (1979); Bush Signs the Clean Air Act of 1990 (1990).

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NIXON SIGNS THE OCCUPATIONAL SAFETY AND HEALTH ACT Nixon Signs the Occupational Safety and HealthA ct

Category of event: Labor Time: December 29, 1970 Locale: Washington, D.C. The Occupational Safety and Health Act of 1970 gave the federal government the responsibility of establishing and enforcing safety standards in the workplace Principal personages: Richard M. Nixon (1913-1994), a conservative Republican president who strongly supported the passage of legislation to improve safety in the workplace Harrison A. Williams, Jr. (1919), the principal author of the Occupational Safety and Health Act George P. Shultz (1920), the secretary of labor during the hearings on the bill, a strong supporter of the legislation Jimmy Carter (1924), the Democratic president who, in the late 1970’s, undertook a substantial revision of OSHA procedures Summary of Event On December 29, 1970, President Richard M. Nixon signed the Occupational Safety and Health Act, mandating that the U.S. Department of Labor establish health and safety standards in the workplace with the goal of achieving the “highest degree of health and safety protection for the employee.” This was one of a series of statutes, sometimes referred to as “public interest labor laws,” that began with the Landrum-Griffin LaborManagement Reporting and Disclosure Act of 1959. The purview of OSHA 551

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is expansive, involving both health and safety standards. In the 1970’s, the Occupational Safety and Health Administration (OSHA), created by the act, stressed direct government regulation of safety in the workplace. In the 1980’s, OSHA extended its efforts to the communication of information, primarily through the labeling of hazardous chemicals. OSHA enforcement involves inspections, financial penalties, and recourse to criminal prosecutions. The act grew out of growing concern for issues related to the environment and awareness of dangers in the workplace, particularly asbestosis (a lung disease caused by breathing asbestos particles), respiratory diseases among cotton workers, and various forms of cancer. Between 1964 and 1969, the injury rate in manufacturing increased by almost 25 percent. Efforts to address black lung disease had been addressed in the Federal Coal Mine Health and Safety Act of 1969. Other acts had been passed to protect certain workers, such as longshoremen and construction workers, but the OSHA regulations superseded these laws and extended to many previously uncovered sectors. Causing considerable controversy were situations in which employers knew of dangers but workers did not. The high cost of safety made it unlikely that standards would be met unless mandated by government statute. It was also hoped that OSHA would alleviate some of the problems associated with state-administered workers’ compensation programs. Some injuries were not compensated or were not adequately compensated, yet the costs of workers’ compensation programs were very high. Advocates of new regulations proposed injury prevention as a way of reducing compensation payments. In addition, it was argued that workers’ compensation programs might cause people to feign injuries, be less cautious, or stay out of work longer than necessary. By increasing time at work and reducing expenditures on workers’ compensation, increased safety would be better for the individuals directly involved and for society as a whole. It was also pointed out that since employers paid into the workers’ compensation program and since benefits to workers differed among states, the cost of injuries was not uniform among the states. As a result, incentives for employers to provide safe workplaces were not the same. In addition, a given safety standard might have different costs in different states, depending on such factors as wage rates and prevailing technology in use. Secretary of Labor George Shultz pointed to the increasing incidence of workplace injuries and the costs of medical care and workers’ compensation claims as evidence of the need for passage of the OSHA law. In congressional hearings it was pointed out that in some European countries national standards had been imposed, but they had met with mixed results. In sectors such as steel and chemicals, the U.S. safety 552

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record was far better than that of the United Kingdom, even though the latter country had a national safety program. The Senate bill (S. 2193) created the National Institute of Occupational Safety and Health (NIOSH) in the Department of Health, Education, and Welfare; and an independent Occupational Safety and Health Review Commission. The first two agencies were to conduct inspections and investigations, and the third was intended to hear appeals by employers relating to the decisions of the first two agencies. A 1978 Supreme Court decision prevented OSHA from conducting inspections without cause, limiting the ability to catch violators in the act. The decision, however, allowed for warrants permitting inspections. States maintained the right to establish their own safety programs provided that they received prior approval from OSHA. State standards therefore had to match those at the federal level or provide greater protection. OSHA provided workers with a form of redress beyond that provided through collective bargaining agreements. Equally important, the Supreme Court ruled in Alexander v. Gardner- Denver (1974) that workers could seek statutory redress even after making use of the grievance procedures established in a collective bargaining agreement. The mandate of the OSHA law represented a shift from issues of cost efficiency in production to equity. The goal was to eliminate injuries in the workplace without explicit consideration of costs and benefits. The legislation represented a movement away from a system for determining reparations after an accident to an approach intended to set standards that would prevent accidents. OSHA brought to the forefront a number of issues central to the future of industrial relations in the United States. Previous legislation such as the Fair Labor Standards Act of 1938 and its amendments set limits on wages, hours, and other conditions of employment, but the way production was conducted was left to be decided by employers and workers. The theory of “compensating wage differentials” argued that unsafe, high-risk jobs would require higher wages to attract workers. Workers who chose those occupations would be compensated for the risk by higher wages. In cases in which the allocation of workers among jobs was unacceptable, unions, through collective bargaining, would negotiate a package of wages and safety standards mutually agreeable to both the employer and the employee. The justification for direct government intrusion into the way production was conducted rested on two premises. To the extent that the way goods are produced affects people other than the employer and the employee, the interest of those others may justify a role for the government. As an example, exposure of pregnant women to certain chemicals may be a health hazard not only to them but also to their future children. Society may feel 553

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compelled to limit such exposure in the interests of the unborn even if the women are willing to risk exposure. OSHA policies sought to control the social costs of unsafe workplaces. A second justification arises in cases in which the risk of disease or injury is not known or is underestimated by the worker. In this context, workers are unable to make informed decisions. From a purely monetary perspective, there may even exist incentives for employers to conceal true risks from employees. In this case, the role of the government may take the form of setting standards or providing information. Impact of Event From its very passage, the OSHA law was plagued with problems. The act provided no penalties to employees who were careless or deliberately unsafe, only an encouragement to act safely. The act provided for sanctions against employers including citations and fines. When corrective measures prescribed by OSHA were not adhered to, the agency had recourse to the courts. In 1972, twenty-four hundred citations were issued under the act. The number increased to forty-three thousand in 1973. Companies found it especially difficult to understand what OSHA expected and how the OSHA standards were to be implemented. The Subcommittee on Labor of the Committee on Labor and Public Welfare of the United States Senate held numerous oversight hearings at which employers vociferously addressed the uneven enforcement of the act, the trivial nature of many standards, and the excessive costs of adherence to standards. Enforcement efforts have been criticized for unevenness and for responding to the preferences of the political party in office. Since the mandate of OSHA can be carried out either by state programs or at the federal level, any assessment must look at the two distinct modes of implementation. Although states were allowed to establish their own mechanisms for enforcement, standards were to at least equal those at the federal level. In part, the federal statute was a response to the failure of state programs to adequately address the problems of workplace injuries, yet the statute allowed for state implementation of the program for two principal reasons. First, some legislators were concerned with states’ rights, particularly in the light of problems with implementing federal programs. Second, there were more than two thousand state inspectors, with millions of dollars spent on safety by states. The federal government was not interested in dismantling the state programs or assuming this additional cost. In September, 1991, a fire at an Imperial Food Products poultry plant in Hamlet, North Carolina, killed twenty-five workers who were trapped in the factory after the employer had locked the exit doors from the outside. 554

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OSHA found serious deficiencies in the enforcement of standards at the state level, precipitating an examination of the state programs. Particular attention was paid to the failure of states to adjust their standards to changes in federal rules. States with separate programs included Alaska, Arizona, California, Hawaii, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Nevada, New Mexico, Oregon, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, and Wyoming, in addition to Puerto Rico and the Virgin Islands. At the federal level, critics of OSHA have come from many camps. Employers have argued that OSHA rules and regulations are trivial and have led to large increases in the cost of doing business. Organized labor has at times argued that the standards are not stringent enough, while in other cases, in which the standards have led to job losses, unions have argued that the standards are too strict. In 1990, maximum fines for each violation were raised from $10,000 to $30,000, and willful violations that led to death were changed from misdemeanors to felonies. Despite annual expenditures in the early 1990’s of approximately $400 million, there is little evidence that OSHA has had the effect of reducing injuries in the workplace. Two explanations are given for the ineffectiveness of OSHA. Some argue that the penalties for violating safety standards are so low that it is more profitable for firms to violate the standards and pay fines if caught rather than make changes to meet standards. In addition, the likelihood of a firm being inspected is very small, so the chances of being caught are very low. The second explanation is that OSHA has concentrated on standards for machinery and equipment while ignoring the human aspect in many accidents. Safe machines do not ensure a safe workplace in the absence of safe operation and supervision. The question is why Congress has continued to support OSHA. Two factors seem to explain continued support. One is that OSHA has been able to increase compliance. In other words, it is able to impose penalties that reduce the likelihood of firms repeatedly violating standards. It can force compliance even if that does not translate immediately into fewer injuries. A second factor is the significant indirect influence of OSHA on the structure of American industry. Large firms and unionized firms tend to be safer in part because of the ability to bear the costs of increased safety and also because of economies of scale associated with safety. An expenditure to make a machine safer will be more cost effective if the machine is used by ten people rather than by one person. OSHA, by concentrating on sectors with the greatest incidence of injuries, intrudes most on small, nonunion operations. As a consequence, costs are driven up in these firms, giving large firms and unionized firms cost advantages. These are the same 555

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firms that are able to influence political decisions the most. It comes as no surprise that these firms support continuation of OSHA. Support may come in the guise of promotion of safety, but large firms also gain a cost advantage as a result of safety and health regulation. A number of lessons have been learned from experience with OSHA. One is the need to consider cost effectiveness in establishing safety standards. In this context, the move toward performance-based regulatory policies was inevitable. In October, 1978, Eula Bingham, director of OSHA during the Jimmy Carter Administration, modified or eliminated almost a thousand OSHA regulations. President Ronald Reagan’s efforts to deregulate led to further reductions in OSHA efforts. The total budget for OSHA went from $97 million in 1975 to $248 million in 1989. By 1989, despite the increase in budget, the staff was still smaller than in 1980, with most of the reduction being enforcement personnel. During the Reagan Administration, the Office of Management and Budget (OMB) was given oversight power. OSHA had to submit proposed reforms to the OMB, which could then hold up implementation. A 1986 court decision required that OMB not restrict OSHA when it faced a statutory deadline. Unions used this rule on behalf of OSHA to get regulations on formaldehyde and lead, among other job hazards. The Office of Management and Budget has estimated that the regulatory costs of OSHA were $2.7 billion in 1987 and $12.7 billion in 1989. The growth in OSHA is evidenced by the following statistics. In 1972, there were 28,900 inspections, 89,600 discovered violations, and $2.1 million in penalties. In contrast, in 1989, there were 58,400 inspections, 154,900 discovered violations, and $45 million in penalties. Bibliography Bartel, Ann P., and Lacy Glenn Thomas. “Direct and Indirect Effects of Regulations: A New Look at OSHA’s Impact.” Journal of Law and Economics 28 (1985): 1-26. Data for the 1974-1978 period show no significant effect of OSHA on injury rates. Gray, Wayne B., and Carol Adaire Jones. “Longitudinal Patterns of Compliance with OSHA in the Manufacturing Sector.” The Journal of Human Resources 26 (Fall, 1991): 623-653. This empirical study looks at the pattern of response to the regulatory efforts of OSHA. U.S. Congress. Senate. Committee on Labor and Public Welfare. Subcommittee on Labor. Legislative History of the Occupational Safety and Health Act of 1970. 92d Congress, 1st session. Senate document 2193. Documents the various amendments to the bill and the positions of interested groups. 556

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Viscusi, W. Kip. Fatal Tradeoffs. New York: Oxford University Press, 1992. A detailed economic discussion of how risk is evaluated. Empirical evidence is used to examine the effectiveness of OSHA in the 1970’s and 1980’s. The author is the leading economic authority on risk in the workplace. Warren, A. C., Jr., ed. “Occupational Safety and Health.” Law and Contemporary Problems 38 (Summer/Autumn, 1974): 583-757. A collection of eight articles looking at the legal and economic aspects associated with the implementation of OSHA. John F. O’Connell Cross-References The U.S. Government Creates the Department of Commerce and Labor (1903); Congress Passes the Pure Food and Drug Act (1906); Roosevelt Signs the Fair Labor Standards Act (1938); The Landrum-Griffin Act Targets Union Corruption (1959); The Three Mile Island Accident Prompts Reforms in Nuclear Power (1979); Bush Signs the Clean Air Act of 1990 (1990).

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THE UNITED STATES SUFFERS ITS FIRST TRADE DEFICIT SINCE 1888 The United States Suffers Its First Trade Deficit Since 1888

Category of event: International business and commerce Time: 1971 Locale: The United States In 1971, the United States suffered its first trade deficit since 1888, importing more than it exported, on its way to becoming a net debtor nation by the end of 1987 Principal personages: Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 Ronald Reagan (1911), the president of the United States, 19811989 Arthur Burns (1904-1987), the chairman of the Board of Governors of the Federal Reserve System, 1970-1978 Summary of Event In 1971, the United States suffered its first balance of trade deficit since 1888, importing $2.26 billion more in goods and services than it exported. The United States recorded a surplus on its trade account in only two of the following fourteen years. In 1973 and 1975, the United States exported $911 million and $8.9 billion more, respectively, than it imported. Between 1980 and 1987, the U.S. trade deficit virtually exploded, growing at a compound annual rate of 29.7 percent, from $25.5 billion in 1980 to $159.5 billion in 1987, the year in which the United States became a net debtor nation, owing more to the rest of the world as a whole than it was owed. To understand the causes and significance of these developments and 558

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events, it is necessary to understand the rudimentary elements of balance of payments accounting and theory. The balance of trade is a part of the overall balance of payments. The balance of payments is a bookkeeping system that records all transactions between nations, including the flows of physical goods and services as well as the financial flows between nations. As a flow concept, the balance of payments must have a time dimension. In general, balance of payments statements are reported on an annual or quarterly basis. They can be reported in terms of the country in question versus the rest of the world or versus a particular region or a particular country. For example, the United States Department of Commerce reports the balance of payments for the United States in its Survey of Current Business on a quarterly and annual basis. The U.S. balance of payments is reported relative to the rest of the world and relative to various regions and countries. A nation cannot simply import more than it exports. It must pay for any excess of imports over exports in one of several ways. It can use up foreign assets that were the result of past investments, spend foreign currency reserve balances or gold reserves it had accumulated in the past, or borrow. A relatively small percentage of imported goods takes the form of gifts or aid from one country to another; these imports do not have to be paid for. Concern about trade deficits centers on the fact that they cannot continue indefinitely. Eventually, reserves of foreign currency and assets will be used up, and other countries eventually will become resistant to lending to trading partners that, because of persistent trade deficits, show little evidence of being able to earn the foreign currency to pay back loans through selling goods and services on the international market. Persistent trade deficits may indicate the need for a reduction in living standards in the deficit country. In simple terms, a trade deficit indicates that a country is consuming and investing more than it produces. Reducing the trade deficit may require reducing consumption of goods and services, thus lowering the standard of living. The foregoing information about the balance of payments should aid in understanding the history of the United States’ balance of trade. In 1960, the United States had a surplus on its balance of trade of $4.9 billion. The value of the United States’ exports in that year was one-third higher than the value of its imports. By 1964, the surplus on the U.S. balance of trade had peaked at $6.8 billion. Exports in that year were 37 percent greater than imports. In 1960, imports and exports were only 2.9 percent and 4.0 percent of the gross national product of the United States, or total value of all goods and services produced in the country that year. U.S. imports and exports 559

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were 11 percent and 16 percent, respectively, of world trade, making the United States an important part of the international marketplace. This asymmetric position—the United States was important to the world economy, but the converse was not true—allowed the United States, the largest trading nation in the world, to operate as though it were a “closed economy” for purposes of domestic macroeconomic policy. A closed economy is one that is closed off from international markets. Because foreign trade was so small relative to the level of U.S. production, policymakers could ignore the effects of international transactions on the U.S. economy when analyzing proposed policies. In 1964, there was little evidence to indicate that in just seven years the United States would suffer its first deficit in eighty-three years in its balance of trade. The balance of payments problem of the moment was a capital outflow from the United States. The subsidiaries of U.S. multinational corporations, foreign corporations, international agencies, and foreign governments were using the U.S. capital markets to raise funds to finance foreign projects. Dollars were flowing out of the United States, and the rest of the world was becoming more indebted to the United States. From 1964 to 1971, the United States’ imports grew at a compound annual rate of 13.3 percent, while its exports grew at only a rate of 8.3 percent. In 1971, the United States suffered a $2.6 billion deficit in its balance of trade, the first such deficit since 1888. The reversal in trading position of the United States can be traced to at least one cause. In the late 1960’s, the United States’ international competitive position deteriorated as the country’s domestic inflation rate, the rate of increase of prices, accelerated. Americans were willing and able to pay higher prices for American goods. Because foreign prices as a whole did not rise as rapidly as did American prices, goods produced in the United States became relatively more expensive. This caused potential foreign buyers to shun American goods, reducing U.S. exports. At the same time, foreign goods appeared increasingly attractive to American buyers because of their relatively lower prices. Imports therefore increased. A combination of falling exports and rising imports led naturally to a balance of trade deficit. The trade deficit thus can be traced to the relatively high inflation rate in the United States. Impact of Event The worsening balance of trade position of the United States led to worldwide concern. In May of 1971, a wave of speculation began that the deutsche mark was going to be allowed to increase in value relative to the dollar. Confidence in the dollar waned, and by early summer the fundamen560

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tal weakness in the U.S. balance of payments became apparent. A widespread belief developed that even though the United States suffered from a high rate of unemployment and sluggish growth, inflation was not being brought under control. Normally, policymakers perceive inflation as a cure for unemployment and vice versa; the problems are not supposed to coexist. Confidence in the dollar ebbed further. Various suggestions came from monetary policymakers including Arthur Burns, chairman of the Board of Governors of the U.S. Federal Reserve System. As chairman of the Board of Governors, Burns directed policy related to the functioning of the U.S. banking system and markets for U.S. treasury bonds. On August 15, 1971, President Richard M. Nixon announced his selection from among the various policy suggestions offered. The United States would suspend the privilege of converting U.S. dollars into gold as well as imposing a 10 percent tax on imports. Major world currencies at the time were all convertible into gold at fixed prices; suspension of convertibility meant that the United States recognized that the dollar had fallen in value relative to gold and relative to other currencies. Suspension of convertibility lowered the desirability of the dollar. Foreign countries would not be as willing to take dollars in exchange for goods knowing that dollars could no longer be traded for gold on demand. This effect, combined with the tax on imports, was intended in part to lower the trade deficit. The dollar was the world’s principal reserve currency at the time, meaning that it was the primary currency used in international exchanges and in settling debts. The exchange rates, or values, of most of the world’s currencies were defined in terms of the U.S. dollar as part of the Bretton Woods System, under which countries had agreed to maintain the values of their currencies within narrow bands. It was clear that the dollar had become overvalued relative to most major currencies, with the agreed-upon fixed rates of exchange making the dollar appear more valuable than it in fact was. The questions were how much the dollar’s value had to fall and how the fall could be achieved. Two alternatives were to allow the dollar to find its own value in the world market, thus eliminating fixed exchange rates, or to negotiate a new set of fixed exchange rates. The latter alternative was chosen. The Smithsonian Conference was convened in Washington, D.C., in December of 1971 in an attempt to save the Bretton Woods System of fixed exchange rates. Representatives of the ten largest industrial nations in the Western world reached an agreement, known as the Smithsonian Agreement, to devalue the U.S. dollar by 8.57 percent, which was accomplished by raising the official price of gold from $35 to $38 per ounce. The Smithsonian Agreement, moreover, allowed 561

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currency values to fluctuate 2.25 percent above and below the fixed rates, allowing some flexibility before the rates would need adjustment. In June of 1972, the new regime of exchange rates established only six months earlier began to collapse. By the second quarter of 1973, the world’s major currencies were “floating.” Rather than being fixed in terms of relative values, the world’s major currencies traded for each other at rates determined by daily market transactions in the international market for foreign exchange. The Bretton Woods System, which had been dying a slow, agonizing death, finally collapsed. The early 1980’s witnessed the United States moving very rapidly from being the world’s largest net creditor nation to being the world’s largest net debtor nation. At the end of 1980, the United States was a net creditor to the rest of the world in the amount of $393 billion. By 1987, the United States had become a net debtor; by the end of 1991, it had accumulated $362 billion in debt. Essentially, this debt was incurred to pay for excesses of imports over exports. The twin deficit theory argues that the tax cuts of the early 1980’s, promoted by President Ronald Reagan, were not followed by spending cuts of equal magnitude. The U.S. government therefore ran huge fiscal deficits and had to borrow to finance its spending. The increased demand for funds by the U.S. government put upward pressure on interest rates, attracting foreign investors in search of higher interest rates. The inflow of capital into the United States and the increased demand for U.S. dollars resulted in an increased value of the dollar as measured against the major currencies of the world. The high value of the U.S. dollar made U.S. exports expensive to the world and made imports cheaper to Americans. A product with a given dollar price becomes more expensive to a foreign buyer as the value of the dollar increases relative to other currencies. This change in the prices of American goods relative to prices in the rest of the world led to a tendency for the U.S. trade deficit to increase. The U.S. dollar rose in value throughout the early 1980’s, and imports grew at astounding rates. The United States ran ever-larger trade deficits, and the value of the dollar kept rising, contrary to accepted theory, which predicts that a country running a trade deficit will find the value of its currency declining. As other countries accumulate a currency, the theory predicts, they will find it less attractive to accumulate even more and will be less willing to take it in trade for goods. That currency therefore should fall in value, rather than rise in value as the U.S. dollar did. Government borrowing apparently offset the effects on the dollar that resulted from trade deficits. The trade deficit of 1971 thus signaled the beginning of a variety of 562

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problems in the U.S. economy. Policymakers faced increasingly unpleasant choices in overcoming trade deficits, debt to foreign countries, government budget deficits, inflation, unemployment, and slow economic growth. The multitude of goals and problems meant that some would have to be ignored. Bibliography Federal Reserve Bank of Atlanta. “Atlanta Fed Research Points to Validity of Twin Deficits Notion.” Economics Update 4 (July-September, 1991): 6-7, 10. This brief article presents arguments for the twin deficit theory, reviews previous research, and presents a review of the Atlanta Fed’s current research on this topic. Howard, David H. “Implications of the U.S. Current Account Deficit.” Journal of Economic Perspectives 3 (Fall, 1989): 153-165. Reviews some of the current empirical literature, concluding that the trade deficit is caused by an insufficiency of domestic savings. Concludes that the United States has gone from the position of a large net creditor to one of a large net debtor. The Feldstein Horioka Puzzle, the high correlation of saving and investment across countries, is discussed. Concludes that evidence indicates that capital is not very mobile internationally. Pigott, Charles. “Economic Consequences of Continued U.S. External Deficits.” Federal Reserve Bank of New York Quarterly Review 13 (Winter/Spring, 1989): 4-15. Concludes that the U.S. trade deficit is fundamentally a result of the imbalance between savings and investment. Policymakers cannot ignore it simply because some of the dire consequences predicted have not come to pass. Actual consequences include job loss and overcapacity in U.S. manufacturing during the early 1980’s and slow U.S. domestic growth in more recent years. The most dire consequences could include a significant increase in the real U.S. long-term interest rate, which in turn could reduce both the future level of investment and productivity growth. Scholl, Russell B., Raymond J. Mataloni, Jr., and Steve D. Bezirgaian. “The International Investment Position of the United States in 1991.” Survey of Current Business 72 (June, 1992): 46-59. Discusses the difficulties in determining the net international investment position of the United States, concluding that the country became a net debtor in 1987, rather than in 1985 as reported earlier. Solomon, Robert. The International Monetary System 1945-1981. New York: Harper & Row, 1982. This book is excellent, well written, and easy to understand. Solomon spent many years at the Federal Reserve System. His perspective, as both a participant in and an objective observer of developments in the international monetary system, is unique. 563

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Yeager, Leland B. International Monetary Relations: Theory, History, and Policy. 2d ed. New York: Harper & Row, 1976. An excellent source for anyone interested in international finance. Contains a wealth of information. Daniel C. Falkowski Cross-References The United States Establishes a Permanent Tariff Commission (1916); The General Agreement on Tariffs and Trade Is Signed (1947); Mexico Renegotiates Debt to U.S. Banks (1989); The North American Free Trade Agreement Goes into Effect (1994).

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THE SUPREME COURT ORDERS THE END OF DISCRIMINATION IN HIRING The Supreme Court Orders the End of Discrimination in Hiring

Category of event: Labor Time: March 8, 1971 Locale: Washington, D.C. In Griggs et al. v. Duke Power Company, the Supreme Court ruled that employers could not require qualifications for jobs that were discriminatory in effect unless those qualifications were proved necessary for the job Principal personages: Willie S. Griggs, a black worker who led the class action suit Warren Burger (1907-1995), the Supreme Court justice who delivered the Griggs decision Hubert H. Humphrey (1911-1978), a U.S. senator who supported the Civil Rights Act of 1964 John Tower (1925-1991), a senator who sought amendments allowing job tests Herman Talmadge (1913), a senator who was concerned about Title VII of the Civil Rights Act Asa Philip Randolph (1889-1979), a black union leader and lifelong enemy of employment discrimination Lyndon B. Johnson (1908-1973), the president of the United States, 1963-1969 Martin Luther King, Jr. (1929-1968), a black leader and organizer of Operation Breadbasket Jesse Jackson (1941), a King aide who led the boycott of biased employers 565

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Summary of Event Legal challenges to the constitutionality of Title VII of the federal Civil Rights Act of 1964 brought the case of Griggs et al. v. Duke Power Company before the U.S. Supreme Court for argument in December, 1970. The Court’s decision, read by Chief Justice Warren Burger, was rendered on March 8, 1971. Beginning in 1866, the American Congress enacted a series of civil rights laws that ostensibly safeguarded citizens’ nonpolitical rights, notably those personal liberties guaranteed to U.S. citizens by the Thirteenth and Fourteenth Amendments to the Constitution. The Civil Rights Act of 1964 became law amid the turbulence of the 1960’s associated with the “Black Revolution,” campaigns for the rights of women, battles for alternative life-styles, environmentalism, and bitter debate over the Vietnam War. The Civil Rights Act of 1964 represented the most sweeping legislation of its kind. President John F. Kennedy, contrary to his political instincts, launched the civil rights bill in June, 1963, five months before his assassination. Anxious to build the Great Society, President Lyndon B. Johnson, Kennedy’s successor, was deeply committed both personally and politically to the principles embodied in the bill. So, too, were liberal members of the Congress, some of whom, including Hubert H. Humphrey, Michael Joseph Mansfield, and Carey Estes Kefauver, were veteran civil libertarians, while others including Samuel James Erwin had become dedicated converts. The real initiatives for fresh civil rights legislation lay outside the White House and Congress, most notably among black leaders. By 1963, Martin Luther King, Jr., and young aides such as Jesse Jackson had begun their dramatic peaceful assaults on segregation in various Southern cities. Almost simultaneously, they had launched Operation Breadbasket, a grassroots effort to bring an end to discriminatory practices that kept substantial numbers of African Americans out of the work force and gravely handicapped their economic opportunities. It was this type of discrimination in particular that was dealt with in Title VII of the 1964 Civil Rights Act. Although hiring discrimination affected many groups, the plight of African Americans, the nation’s largest minority, was singularly bad in the early 1960’s, and in some regards it was worsening. Long a leader against discrimination in trade unions and a proponent of equal employment opportunities, the president of the Brotherhood of Sleeping Car Porters, Asa Philip Randolph, outlined the effects of hiring and job discrimination to a U.S. Senate subcommittee in 1962. Randolph pointed to the relatively small number of skilled black workers in the nation, to segregation and racial barriers in trade unions and in apprenticeship programs, to a disproportion566

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Chief Justice Warren Burger delivered the Court’s Griggs decision and spoke out forcefully against discrimination in hiring. (Supreme Court Historical Society)

ate concentration of black workers in unskilled occupations, and to new technologies that were diminishing industry’s need for unskilled labor. He noted that the percentage of black carpenters, painters, bricklayers, and plasterers, for example, had declined precipitously since 1950. In addition, the unemployment rate for black workers was nearly three times the rate for whites. Such was the background against which Willie S. Griggs and thirteen 567

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fellow black coworkers at the Duke Power Company’s Dan River Steam Station in Draper, North Carolina, brought a class action suit against their employer. All the black workers at the Dan River Plant worked in the Labor Department, in which the highest paying jobs paid less than the lowest paying jobs that whites held in the plant’s four other departments. Promotions within departments were normally made on the basis of seniority, and transferees into a department usually began in the lowest positions. In 1955, the Duke Power Company began requiring a high school diploma for assignment to any department except Labor. When the company eliminated its previous policies of segregation and stopped restricting black workers to the Labor Department, a high school diploma remained a prerequisite for transfer to other departments. In 1965, the company announced that for new employees, placement in any department except Labor was dependent on the achievement of adequate scores on two professionally designed high school equivalency tests. It was in this regard that the Griggs case invoked Title VII of the 1964 Civil Rights Act. The workers argued that black workers were less likely than whites to pass the tests but that performance on the tests was unrelated to ability to perform jobs. The longest debate in American legislative history had preceded passage of the Civil Rights Act. Congress had laboriously made clear its intent in regard to Title VII: It was to achieve equality of employment opportunities and to remove previous barriers that had favored identifiable groups of white workers. No part of the act barred employers from utilizing “neutral” tests, practices, or procedures in selecting or promoting employees. Delivering the opinion of the Supreme Court in the case, Chief Justice Warren Burger reiterated these congressional objectives. Speaking for a unanimous Court, Burger declared that even when an employer’s tests, procedures, or practices were “neutral” in their intent, they could not be maintained if their effect was to freeze the status quo of prior discriminatory employment practices. What the Civil Rights Act and Title VII proscribed were any “artificial, arbitrary, and unnecessary barriers to employment” when such barriers served to discriminate on the basis of race, color, religion, sex, or any other impermissible classification. Burger acknowledged that the test requirements instituted by the Duke Power Company were intended to improve the overall quality of its work force. The Chief Justice noted, however, that employment practices that could not be shown to be related to job performance and that disproportionately excluded black workers from employment opportunities were clearly prohibited. An employer’s good intent or absence of discriminatory intent, Burger continued, did not redeem employment procedures or testing mechanisms that oper568

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ated as “built-in headwinds” for minority groups and were unrelated to measurements of job performance. Burger emphasized that the purpose of Title VII was to protect the employer’s right to insist that any job applicant, black or white, must meet the applicable job qualifications. Title VII in fact was designed to facilitate hiring on the basis of job qualifications rather than on the basis of race or color. Impact of Event Title VII of the Civil Rights Act of 1964, however strongly President Johnson and liberal members of Congress felt about its objectives, did not miraculously abolish ingrained discriminatory hiring and employment practices. Despite the vast powers that Johnson derived from being the head of the country’s largest employer, the federal government itself, and from having some control over billions of dollars in federal contracts, his power was circumscribed. The federal bureaucracy, many observers noted, was lethargic, and the country’s great corporations and unions could not lightly be antagonized, particularly because the president required their support to attain other goals of his Great Society. After appointing Vice President Hubert H. Humphrey, one of the country’s leading civil libertarians, to lead the President’s Committee on Equal Employment Opportunity in February, 1965, Johnson abruptly removed him the following September. Taking this as a signal of presidential will, the agencies charged with implementing fair employment policies tended to drift. There were gains, most notably in the changed public attitudes about race. Whereas in 1944 only 45 percent of whites polled believed that African Americans should have as good a chance as whites to secure jobs, in 1963, 80 percent espoused that belief. The U.S. Civil Service Commission increased the percentage of black workers in government jobs, principally in the Post Office. The Civil Rights Commission, however, found that the enforcement of nondiscrimination provisos in government contracts was almost nonexistent, and the Equal Employment Opportunity Commission (EEOC) that had been created to oversee applications of Title VII struggled without enforcement powers. Operation Breadbasket, initiated by Martin Luther King, Jr., and conducted largely by his aide, Jesse Jackson, had boycotted businesses until they opened jobs to black workers, but its efforts and success gradually diminished. Black unemployment ran four to five times as high as unemployment among whites. The problem was especially severe in inner cities. By the early 1970’s, there were signs of improvement. Enforced or not, the Civil Rights Act of 1964 encouraged employers to hire more black workers. This cause was aided by labor shortages of the 1960’s as well as 569

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improvements in the education of black labor force entrants. Moreover, by 1972, Congress had granted the EEOC power to initiate legal action against businesses showing evidence of employment discrimination, and major offenders were soon forced to comply with Title VII’s mandates. For these reasons, among others, black men nearly tripled their employment in white collar jobs. Black women also gained in employment generally, with strong gains in white collar jobs. Accordingly, the gap between white and black incomes narrowed significantly. The median income of black employees, for example, had been 59 percent of that of whites in 1959. By 1969, the proportion had risen to 69 percent. Employed black women, during the same period, raised their median income to 93 percent of that of white female employees, although women generally were paid less than were men. By March, 1971, when Chief Justice Burger delivered the Court’s decision in the Griggs case, some observers believed that despite the Civil Rights Act of 1964, the gap in opportunities between blacks and other Americans was widening. Increases in the numbers of black high school dropouts, black welfare recipients, and black women giving birth out of wedlock, as well as in venereal disease, drug abuse, and crime among African Americans, seemed to substantiate such assertions. According to some observers, the African American population had taken on the configurations of a distinct underclass. As indicated above, however, there was heartening evidence that black workers were closing economic gaps between them and mainstream white society. Challenges to hiring and promotional barriers through Title VII and an empowered EEOC were important contributing factors to the hastening of this process. The liberal position taken by the Burger Supreme Court in giving specific weight to Title VII’s objectives in the Griggs case also undoubtedly strengthened federal and state attacks on employment discrimination. To many black leaders, such decisions proved the worth of the 1964 Civil Rights Act. As Roy Wilkins told the Fifty-fifth Annual Convention of the National Association for the Advancement of Colored People (NAACP), the principal value of the act was the recognition by Congress that African Americans are constitutional citizens, recognition necessary to begin the pursuit of happiness through political, social, and economic progress. Wilkins might have gone further. As legal scholars observed, the Griggs decision went beyond the Constitution. The Constitution prohibited only intentional discrimination, and the illegality of such discrimination had for decades been beyond legal question. After the Griggs opinion, legislation such as the 1964 Civil Rights Act’s Title VII was interpreted to prohibit de facto discriminatory effects of employment practices as well. 570

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Bibliography Auerbach, Jerold S., ed. American Labor: The Twentieth Century. Indianapolis: Bobbs-Merrill, 1969. Commentary and documents presented clearly by a labor historian and other specialists. Part 4 is particularly relevant, dealing with civil and economic rights, race, segregation, employer and union job discrimination, and the impacts of automation. Part 3 also deals with major labor legislation. Berger, Morroe. Equality by Statute: The Revolution in Civil Rights. New York: Octagon Books, 1978. A clearly written, intelligent survey of subject. Chapter 4 examines efforts to reduce employment discrimination in New York State as a mirror of national problems. Chapter 1 details creation of the EEOC and increments to its powers. Chapter 5 is an acute analysis of the effects of law in controlling prejudice and discrimination. Blasi, Vincent, ed. The Burger Court: The Counter-Revolution That Wasn’t. New Haven, Conn.: Yale University Press, 1983. The main thesis linking these expert analyses of the Burger Court is that it continued its work much in the same liberal spirit in regard to civil rights as its predecessor, led by Chief Justice Earl Warren. The Griggs case is treated in chapters 6 and 7, in context with analogous cases. Contains photos and biographies of Burger Court justices. Hall, Kermit L., ed. The Oxford Guide to United States Supreme Court Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Matusow, Allen J. The Unraveling of America: A History of Liberalism in the 1960s. New York: Harper & Row, 1984. An outstanding survey. Richly detailed and critical but well balanced. Places the Griggs case in context with a gamut of racial and employment problems. A fine historical survey, clearly written and engaging. Schwartz, Bernard, comp. Civil Rights. 2 vols. New York: Chelsea House, 1970. Consists of federal legislation, extracts from congressional debates, and Supreme Court decisions, with commentary by the compiler. An outstanding work for the background and context of Title VII. Whalen, Charles, and Barbara Whalen. The Longest Debate: A Legislative History of the 1964 Civil Rights Act. Washington, D.C.: Seven Locks Press, 1985. Written by an outstanding congressman and civil libertarian with his columnist wife. This is an informative, engaging commentary and excerpting of testimony on an extraordinarily complex and politically difficult bill. Ample discussion of the EEOC and Title VII. Clifton K. Yearley

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Cross-References The Wagner Act Promotes Union Organization (1935); Roosevelt Signs the Fair Labor Standards Act (1938); The Taft-Hartley Act Passes over Truman’s Veto (1947); The Civil Rights Act Prohibits Discrimination in Employment (1964); The Pregnancy Discrimination Act Extends Employment Rights (1978); The Supreme Court Rules on Affirmative Action Programs (1979); Firefighters v. Stotts Upholds Seniority Systems (1984); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986).

572

AN INDEPENDENT AGENCY TAKES OVER U.S. POSTAL SERVICE An Independent Agency Takes Over U. S. PostalService

Category of event: Government and business Time: July 1, 1971 Locale: Washington, D.C. The Postal Reorganization Act of 1970 replaced the U.S. Post Office Department with the semi-independent U.S. Postal Service, established to modernize mail delivery, make operations more efficient, and be self-supporting Principal personages: Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 Frederick R. Kappel (1902-1994), the head of the President’s Commission on Postal Organization under President Lyndon B. Johnson Lawrence O’Brien (1917-1990), the postmaster general under President Johnson Winton M. Blount (1921), the postmaster general under President Nixon Summary of Event President Richard M. Nixon signed the Postal Reorganization Act on August 12, 1970. The reorganization was the culmination of an effort begun during the administration of Lyndon B. Johnson, when the President’s Commission on Postal Organization, popularly known as the Kappel Commission, recommended that the Post Office Department be made independent and self-supporting. The U.S. Postal Service, as an independent, government-owned agency, 573

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replaced the Post Office Department. An eleven-member commission managed the service. The commission was composed of nine governors who were appointed by the president and confirmed by the Senate. Their terms were staggered, and no more than five governors could come from one political party. Also serving on the commission were the postmaster general and a deputy postmaster general, both of whom were appointed by the governors. The postmaster general was no longer a member of the president’s cabinet. The new agency was phased in during 1971. The Postal Service was freed from the financial control of Congress and was authorized to issue bonds for capital improvement. A limit of $10 billion was placed on outstanding debt, with a $2 billion annual limit on new issues. Proceeds of bond issues were initially used to modernize buildings and automate processes. The service was expected to move toward self-sufficiency but would continue to be subsidized until able to break even. The subsidy took the place of large rate increases. Significant improvements were made to operations. Political appointments of local postmasters were replaced by a merit system. Specific criteria were established for hiring and promotion. Postal workers were given the right to negotiate for wages and benefits. Binding arbitration would be used to settle labor disputes. As part of the Reorganization Act, postal workers received an 8 percent pay raise. The cost of stamps was raised to eight cents for first-class mail. A similar increase was instituted for bulk mail. Increases for second-class mail would be phased in gradually. A five-member Postal Rate Commission would have the authority to set future rate increases, with Congress retaining the right of veto. New services were provided to customers, including the Priority Mail next-day delivery system and Mailgrams, letters sent by telegraphs. To handle customer complaints, an Office of Consumer Advocate was established. The entire operation was decentralized. Regional directors were given greater autonomy, and the number of regions was reduced to five. In 1970, the Post Office Department handled more than eighty-seven billion pieces of mail, making it the largest postal operation in the world. It was also the largest civilian government agency, employing more than 750,000 workers, a payroll comparable to those of General Motors Corporation and American Telephone and Telegraph (AT&T). The Post Office Department was plagued by problems in all phases of its operation. A deficit of $2.6 billion was expected in 1970. The operation relied heavily on manual work, with clerks able to hand-sort only eighteen letters a minute. The Post Office relied on the airlines and Amtrak to deliver intercity mail. Route cutbacks slowed down the mail. Coast-to-coast delivery took 574

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ten days, and intracity delivery often took two days. Second-class mail delivery of newspapers and magazines was frequently delayed by as much as ten days. The problems of the Post Office Department were widely believed to be caused by political influence. Postmaster jobs were filled by political appointees, and within-the-ranks promotion was considered unlikely for someone without political connections. The inefficiency and the lack of capital improvements were blamed on Congress, which often failed to appropriate funds for automation or building improvements. Within the Nixon Administration, there was a strong desire to implement modern management techniques throughout government operations, including the Post Office. Working conditions for postal workers were below the standard of industry of the time. The Post Office experienced a turnover rate of 23 percent, lower than the industry average of the time. It took thirteen weeks to hire a new worker. Post Offices in some large cities experienced difficulty filling vacant positions; in 1970, more than nine hundred positions were unfilled in New York City. Post Office jobs started at a salary of $6,176, and the top pay grade was $8,440, reached after twenty-one years of service. Most buildings were not air conditioned. Many had no parking lots or cafeterias, and toilet facilities were often inadequate. Few Post Offices had doctors or first aid available for workers, and accident rates were high. Prior to the Depression, Post Office Department jobs were desirable. After World War II, there was increased labor competition from industry, and the Post Office had difficulty attracting workers. The department, under the Civil A weary mail carrier rests inside a storage box in Service System, was not able Los Angeles in early 1971—only months before the to pay differential rates in U.S. Postal Service was created to make delivery high-cost areas such as New operations more efficient. (R. Kent Rasmussen) 575

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York City. In 1970, 10 percent of that city’s postal workers qualified for welfare. After three years of service, garbage collectors in New York City were paid more than postal workers with twenty years of service. The idea of reorganizing the Post Office Department originated with Lawrence O’Brien, who was postmaster general in the Johnson Administration and who believed that the Post Office should be made independent and self-sufficient. President Johnson established the President’s Commission on Postal Organization and appointed Frederick R. Kappel, former chairman of AT&T, as chairman of the commission. In June, 1968, the commission recommended that the Post Office Department be reorganized and placed on a self-sufficient basis. President Nixon’s postal reform message on May 27, 1969, endorsed the proposal. Opposition reached a peak in March, 1970, when the New York postal workers staged an illegal strike. Congress added a binding arbitration clause to the legislation. In April, 1970, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), with George Meany as bargainer, reached an agreement with the government to end the strike. On August 12, 1970, President Nixon signed the Postal Reorganization Act, which authorized the creation of the U.S. Postal Service. On June 26, 1971, an eight cent first-class stamp was issued with the U.S. Postal Service emblem, and on July 1, 1971, the service was born. Impact of Event The Postal Reorganization Act shifted control of the postal system from Congress and the president to the managers of the new U.S. Postal Service. This provided immediate political advantage to the White House and Congress, which no longer could be directly blamed for the failings of the system. Until 1979, the Postal Service ran annual operating deficits. In 1979, the service reported an operating surplus of $470,000. Deficits occurred even though postal rates rose significantly after reorganization. The cost of mailing first-class letters rose 150 percent from 1970 to 1977, with similar increases for second-class and bulk mail. Firms were able to compete with the Postal Service to deliver bulk mail, but not first-class mail. After 1971, this competition accelerated. The business community showed concern about the increased cost of bulk-mail advertising and other kinds of business mail. The bulk-mail industry was the most affected by the change. After 1971, costs of bulk mail continued to rise, and service did not measurably improve. Firms that entered the bulk-mail business at the time of reorganization were able to offer lower rates because they delivered advertising mail door 576

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to door. No mailing labels or sorting was necessary, thus reducing costs. Leading firms included Independent Postal Systems of America of Oklahoma City, Oklahoma; Consumer Communications Services Corporation of Columbus, Ohio; American Postal Corporation of Los Angeles, California; Pacific Postal System of San Francisco, California; and Continental Postal Service of Charlotte, North Carolina. Some firms began delivering their own bills to customers. Virginia Electric and Power Company was able to deliver its own monthly bills for as little as five cents apiece in urban areas at a time when the Postal Service charged eight cents. Under the Reorganization Act, it was legal for firms to deliver their own first-class mail. The greatest concern within the Postal Service was the increased competition from the United Parcel Service, which soon had half of the smallparcel delivery market. The competitive advantage United Parcel Service enjoyed resulted from its reputation for reliable, consistent, and rapid delivery and from its ability to charge lower rates than those of the Postal Service. Management improvements in the new Postal Service focused on improving airmail service, with a goal of next-day delivery for airmail. Airlines depended on airmail for revenue. After reorganization, the Postal Service was able to negotiate terms with carriers. There was fear within the airline industry of the resulting increase in competition. Airmail standards set by the Postal Service were next-day delivery for destinations within six hundred miles, with all other deliveries to be made within two days. The Mail Express program was inaugurated, with door-to-door delivery by courier. The Postal Service experienced a 35 percent increase in productivity from 1970 to 1980. According to the Postal Service’s own reports, by 1980 the system succeeded in delivering 95 percent of first-class mail within one day. Intercity mail traveling less than six hundred miles was delivered within two days 86 percent of the time, and cross-country mail was delivered within three days 87 percent of the time. The first U.S. Postal Service bonds were issued in October, 1971, in the amount of $250 million. The bonds were issued for capital improvement, with two areas of initial focus. A bulk mail system was designed to include twenty-one processing centers using modern technology, computers, and conveyor systems. The second project was a letter mail code sort system. A pilot plant was built in Cincinnati, Ohio, and used optical scanning equipment and other technologies to sort mail. After the reorganization, there were significant cuts in headquarters and regional staffs. The new agency started with $3 billion in assets and 577

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$1 billion in cash, which could be invested in U.S. government securities. In 1972, the service ordered a hiring freeze in an attempt to reduce costs. Labor contracts did not allow a reduction in force, so inducements for early retirement were offered. Experienced postal managers responded to the offer, significantly reducing the Postal Service deficit for 1973. The loss of experienced managers, however, resulted in deterioration of service and public criticism. The backlash resulted in additional hiring and subsequent growth of the deficit. Postal unions were able to negotiate no-layoff clauses in their contracts; nonunion postal employees did not have such protection and significant reductions in work-force levels occurred. From 1970 to 1980, the number of full-time-equivalent postal employees declined by forty-six thousand. After 1971, wages increased at a higher rate than that of other government workers, primarily because of cost-of-living adjustments included in union contracts. During the inflation-plagued 1970’s, postal wages more than doubled. Federal Express was founded in 1971 as a competitor to the government’s mail operation. The reorganization of the Postal Service and the emergence of Federal Express and other overnight delivery services revolutionized the way business mail was sent and received. In 1980, Mail Boxes Etc. of San Diego, California, extended innovations in service to the individual consumer. For hundreds of years, it had been believed that mail delivery must be provided by a protected government monopoly. The 1971 reorganization of the Postal Service challenged that basic belief and made possible advances in mail delivery and processing. Bibliography Blount, Winton Malcolm. “Overhauling the Mails: Interview with Postmaster General Blount.” U.S. News and World Report 68 (May 4, 1970): 46-51. An interview with the postmaster general at the time reorganization was under consideration by Congress. Shows the extent of operational considerations and the optimism of Post Office Department management for reform. Fleishman, Joel L., ed. The Future of the Postal Service. New York: Praeger, 1983. Good critical analysis of the effects of reorganization on government, labor, business, and the communications industry. Includes international comparisons as well as detailed economic information. Recommends further restructuring and management improvements. Fowler, Dorothy Ganfield. Unmailable: Congress and the Post Office. Athens: University of Georgia Press, 1977. A highly readable history of the Postal Service from the appointment of Benjamin Franklin as post578

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master general in 1753 to the formation of the U.S. Postal Service in 1971. Covers the important role the Postal Service has played in American history and the relationship between Congress and the postal service. Good focus on the dynamics that led to reorganization. Fuller, Wayne E. “The Politics and the Post Office” and “Epilogue.” In The American Mail: Enlarger of the Common Life. Chicago: University of Chicago Press, 1972. A history of political control of the Post Office, from establishment to reorganization in 1971. A balanced report that illuminates both positive and negative aspects of this control. The epilogue recounts the congressional debate leading to passage of the Reorganization Act. Nixon, Richard M. Nixon: The Second Year of His Presidency. Washington, D.C.: Congressional Quarterly, 1971. Contains Nixon’s statements on the postal reorganization, the postal strike, and the settlement of the strike. _____. “Toward a Better Postal Service.” In Setting the Course, the First Year: Major Policy Statement by President Richard Nixon. New York: Funk & Wagnalls, 1970. Contains Nixon’s policy statements on the need for reorganization. The chapter outlines the structural and political problems inherent in the Post Office Department as well as the basic objectives of reform. Sandford, David. “Post Office Blues, the Mail That Costs More and Comes Sometimes.” The New Republic 162 (March 21, 1970): 19-22. Focuses on customer frustration with Post Office Department performance prior to reorganization. Particular emphasis is placed on problems experienced by weekly news magazines regarding delays in second-class mail delivery. Inequities in the rate structure are covered. Tierney, John T. Postal Reorganization: Managing the Public’s Business. Boston: Auburn House, 1981. An in-depth study of the reorganization of the Postal Service, from a broad perspective essentially favorable toward the system. Focuses on managerial initiatives within the postal system and the changing dynamics of labor relations. Also shows the effects of competition on the operation of the postal service. _____. “Untangling the Mess in the Post Office.” Business Week, March 28, 1970, 78-80. A survey of the problems plaguing the reorganization of the Post Office Department. Covers all aspects, including labor, systems performance, management, and political influence. Comparison with other nations is included. Good coverage of the political concerns that led to reorganization. Alene Staley

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Cross-References The U.S. Government Creates the Tennessee Valley Authority (1933); Amtrak Takes Over Most U.S. Intercity Train Traffic (1970); AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement (1982); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999).

580

NIXON SIGNS THE CONSUMER PRODUCT SAFETY ACT Nixon Signs the Consumer Product Safety Act

Category of event: Consumer affairs Time: October 28, 1972 Locale: Washington, D.C. The Consumer Product Safety Act established an independent agency of the federal government to investigate the causes of product-related injuries and to develop regulations to control their occurrence Principal personages: Warren Grant Magnuson (1905-1989), a U.S. senator from California and a member of the Senate Committee on Commerce John E. Moss (1913-1997), a U.S. senator from California and a member of the Senate Committee on Commerce Richard M. Nixon (1913-1994), the thirty-seventh president of the United States Charles Percy (1919), a U.S. senator from Illinois, the sponsor of the bill Summary of Event The Consumer Product Safety Act of 1972 (CPSA) established the Consumer Product Safety Commission (CPSC) as an independent agency of the federal government. The CPSC was given authority to identify unsafe products, establish standards for labeling and product safety, recall defective products, and ban products that posed unreasonable risks to consumers. In order to ensure compliance with its directives, the CPSC was given authority to impose civil and criminal penalties, including fines and jail sentences. 581

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Prior to the enactment of the CPSA, attempts to reduce hazards associated with consumer products were fragmented and produced uneven results. Federal, state, and local laws addressed safety issues in a limited, piecemeal manner. Industry self-regulation was occasionally attempted by trade associations, testing laboratories, or other standards-making groups. Competitive economic forces often delayed or weakened the establishment of standards, and the inability of the industry legally to enforce standards once they were set often made these attempts little more than window dressing. In 1967, members of Congress decided that there had to be a consistent approach to the problems of injuries resulting from the use of consumer products. The House of Representatives and the Senate enacted PL 90-146 in June, 1967, creating the National Commission on Public Safety. The commission was given the responsibility of identifying products presenting unreasonable hazards to consumers, examining existing means of protecting consumers from these hazards, and recommending appropriate legislative action. In June, 1970, the commission reported the magnitude of the problem: 20 million people were injured each year because of incidents related to consumer products; 110,000 people were permanently disabled from such accidents; and 30,000 deaths resulted each year. The cost to the country was estimated to be more than $5.5 billion a year. The commission suggested that consumers were in more dangerous environments in their own homes than when driving on the highway. The commission outlined sixteen categories of products as providing unreasonably hazardous risks to the consumer. Architectural glass used for sliding doors in homes caused approximately 150,000 injuries a year; the commission recommended that safety-glazed materials be required for this use. Hot-water vaporizers that were capable of heating water to 180 degrees repeatedly caused second- and third-degree burns to young children. High-rise bicycles with “banana” seats, high handlebars, and small front wheels encouraged stunt riding and frequently resulted in injuries. Furniture polish with 95 percent petroleum distillates was packaged in screw-cap bottles, colored to resemble soft drinks, and attractively scented; many children who drank it suffered fatal chemical pneumonia. Power rotary lawn mowers sliced through fingers and toes and sent objects hurtling toward bystanders. Other products that the commission identified as posing unreasonable potential hazards to consumers included color television sets, fireworks, floor furnaces, glass bottles, household chemicals, infant furniture, ladders, power tools, protective headgear (especially football helmets), unvented gas heaters, and wringer washing machines. The commission maintained that it was not entirely the responsibility of consumers to protect themselves, because they could reasonably be ex582

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pected neither to understand all the existing hazards nor to know how to deal effectively with the hazards. Although consumers were becoming increasingly successful at receiving compensation for injuries through common law, manufacturers in general had not responded by taking preventive measures. The commission suggested that a national program was needed to prevent further accidents and injuries. At hearings before the U.S. Senate Committee on Commerce on June 24, 1970, the National Commission on Public Safety recommended that an independent agency, the Consumer Product Safety Commission, be formed. Hearings were held between May of 1971 and February of 1972. These hearings allowed individuals representing both businesses and organizations concerned with health and safety issues to testify. Competing legislation included proposals to give the responsibility for oversight to the existing secretary of health, education, and welfare rather than to an independent agency. One proposal would have permitted the adoption of an existing private standard as a federal safety standard; this proposal, however, was criticized on the grounds that it might result in the acceptance of private standards that were inadequate or anticompetitive. Witnesses at the hearings testified on the problems of hazardous household products, the function and effectiveness of state and local laws, and the role of advertising and the need for public education and debated whether the American economy would reward or punish producers of safe consumer products, which were likely to carry higher prices. Manufacturers, legislators, college professors, attorneys, publishers, representatives of trade and professional associations, engineers, and physicians provided information and opinions on the proposed legislation. The process brought about intense lobbying and heated debates. Companies saw the CPSC as a potential source of harassment, with government decisions affecting their industries. Sponsors of the legislation complained that regular government agencies listened too closely to the very industries that they were directed to regulate and ignored the voice of the consumer. Long filibustering sessions and angry accusations nearly killed the legislation. Observers claimed that key sponsors could have brought the issue to a vote sooner but were not present when votes on stopping the filibustering were taken. The Richard M. Nixon Administration publicly supported the legislation, but key aides supported the filibustering. The Grocery Manufacturers of America, a business lobby, distributed information kits on how to fight the bill in Congress, calling the legislation a threat to free enterprise. Opponents warned of the authority the agency could have, claiming that it had the potential to turn against the consumer, side with big business, and increase the costs of products to consumers. 583

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Impact of Event As it was passed in 1972, the Consumer Product Safety Act charged the CPSC with four main tasks: to protect the public from unreasonable risks of injury associated with the use of consumer products; to be of assistance to consumers in evaluating and comparing the safety of consumer products; to develop uniform safety standards for consumer products; and to encourage research and investigation into the causes and prevention of productrelated deaths, illnesses, and injuries. “Consumer products” were defined both as things sold to customers as well as things distributed for the use of customers (such as component parts). Specifically excluded were tobacco and tobacco products, motor vehicles and equipment, pesticides, firearms and ammunition, aircraft, boats and equipment, drugs, cosmetics, and foods, as these fell under the jurisdiction of other existing agencies. Responsibility for a product was extended to include producers, importers, and, basically, anyone who handled the product in the stream of commerce. The CPSC established a National Electronic Injury Surveillance System (NEISS) in order to collect and investigate information on injuries and deaths related to consumer products. NEISS is a computer-based system tied into more than one hundred hospital emergency rooms. The information in this system allows the commission to compute a product “hazard index.” Products with the highest hazard indices—such as cleaning agents, swings and slides, liquid fuels, snowmobiles, and all-terrain vehicles—are targeted for further studies and possible regulation. The CPSC is authorized to perform in-depth studies on accidents and to investigate the effects and costs of these injuries to individuals and the country as a whole. If the CPSC believes there is significant cause, it can investigate the industry and product in question with the goal of encouraging voluntary industry safety standards or initiate mandatory safety standards of its own. If CPSC investigators believe that safety standards are required, they will research the product, develop test methods if necessary, and propose an appropriate safety standard. Proposals for appropriate standards are also solicited from the affected industry. Interested organizations, individuals, and industry representatives testify during open hearings on the proposed standards. After the hearings, the standards may be modified or enacted as proposed. Products that fail to meet the standards within a set period of time (from one to six months) may be pulled from store shelves, and manufacturers may face fines as well as jail sentences. If adequate safety standards cannot be designed, court action may be taken to have the products banned. So that unreasonable demands are not placed on a small company, fines for violations may be limited, or establishments of particular sizes may be given extensions of time in which to comply with regulations. 584

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The establishment of specific standards is a process that is frequently viewed with concern by the manufacturers involved. When changes in manufacturing, product design, or labeling are suggested, manufacturers’ associations respond with proposals, which include estimates of the additional costs necessary to implement the changes. Cost/benefit criteria are considered to determine if the benefits of a proposed action can be justified by the attendant costs. This not an easy issue to revolve. For example, the changes that were contemplated in the design of power lawn mowers included locating pull cords away from chokes and throttles, installing footguards, redesigning exhaust systems, and installing automatic cutoffs. The enacted changes increased the price of the power lawn mower to the consumer by an average of twenty-two dollars. Manufacturers, legislators, and administrative figures all were aware of the potential power of CPSC. The establishment and enforcement of standards had the potential to raise the costs of manufacturing and, consequently, increase prices to consumers. Regulations had the potential to limit the types and quality of consumer products on the market. Passing the Consumer Product Safety Act did not bring an end to the debate. The CPSC’s first action was to establish flammability standards for mattresses. As soon as the new regulations were established, the CPSC was promptly taken to court both by manufacturers’ associations and by consumer groups unhappy with the standards. Manufacturers claimed that they were being unfairly asked to absorb the costs of switching materials and conducting new testing procedures; the problem, the manufacturers alleged, was really caused by careless cigarette smokers. Consumer groups claimed that the standards were not strict enough, since small manufacturers were given additional time during which they could sell mattresses that did not meet the flammability standards if such mattresses were prominently so labeled. Consumer groups wanted only safe mattresses on the market, without a time delay. In spite of the potential for unlimited power claimed by opponents, the CPSC—a watchdog agency—soon became the watched. Critics of regulatory agencies argue that solutions to safety problems cost money and that these costs will be passed along to consumers. Direct costs, such as those involved in retooling, testing, labeling, and changes in personnel and material, are relatively easy to determine. Trade associations and manufacturers argue that government standards actually limit consumers’ freedom of choice, increase costs, put people out of work, and lead to excessive governmental control. Many associations advocate self-regulation in order to preempt government involvement. Consumer-protection advocates contend that if self-regulation could solve the problem, there would not be any problem. They also argue that costs are inevitable when safety 585

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is concerned. Indirect costs, including hospital and doctors’ fees, time lost from work, and pain and suffering from injuries, must be paid, whether by injured consumers, insurance companies, or manufacturers. Regardless of who pays directly, the ultimate cost is passed on, whether to the consumer or to the public as a whole. Bibliography Burda, Joan M. An Overview of Federal Consumer Law. Chicago: American Bar Association, 1998. Practical guide prepared by the American Bar Association. Commerce Clearing House. Consumer Product Safety Act: Law and Explanation. Chicago: Author, 1972. Contains the text of the law and an overview of its meaning and intent. Evans, Joel R., ed. Consumerism in the United States: An Inter-Industry Analysis. New York: Praeger, 1980. The history of consumerism is examined in ten industries. The roles of consumer groups, industries, individual companies, and the government are explored. Describes the effects of consumerism and legislation and the reactions by the businesses studied. Katz, Robert N., ed. Protecting the Consumer Interests. Cambridge, Mass.: Ballinger, 1976. An edited version of papers presented by the National Affiliation of Concerned Business Students. Chapter 10, “The Consumer Product Safety Commission: Its Clout, Its Candor, and Its Challenge,” by R. David Pittle, is an especially valuable essay. Mayer, Robert N. The Consumer Movement: Guardians of the Marketplace. Boston: Twayne, 1989. A history of consumerism as a social movement, with an examination of the factors that affect the success of regulatory action. Attempts to quantify the economic impact of consumer-protection policies. Office of the General Counsel, ed. Compilation of Statutes Administered by CPSC. Washington, D.C.: U.S. Consumer Product Safety Commission, 1998. Unofficial compilation of laws relating to the Child Protection and Toy Safety Act assembled for consumer use. Indexed. U.S. Consumer Product Safety Commission. Regulatory Responsibilities of the U.S. Consumer Product Safety Commission: Study Guide. Washington, D.C.: Government Printing Office, 1976. Developed as a training manual for entry-level inspectors. Easy to read. Excellent definitions, with detailed lists and explanations of products that are specifically not covered by legislation. Has quizzes and answers. Sharon C. Wagner

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Cross-References Congress Passes the Pure Food and Drug Act (1906); Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965); The United States Bans Cyclamates from Consumer Markets (1969); The Banning of DDT Signals New Environmental Awareness (1969); The U.S. Government Reforms Child Product Safety Laws (1970’s).

587

THE UNITED STATES PLANS TO CUT DEPENDENCE ON FOREIGN OIL The United States Plans to Cut Dependence on Foreign Oil

Category of event: International business and commerce Time: 1974 Locale: Washington, D.C. In 1974, responding to disruptions in world oil supplies, the Federal Energy Administration formulated plans to reduce U.S. dependence on foreign oil, plans that later became national legislation Principal personages: Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 Gerald R. Ford (1913), the president of the United States, 19741977 Jimmy Carter (1924), the president of the United States, 1977-1981 Ronald Reagan (1911), the president of the United States, 19811989 James R. Schlesinger (1929), the secretary of the Department of Energy, 1977-1979 Summary of Event In the late 1960’s and early 1970’s, the economy of the United States became dependent upon oil imports, especially from the Middle East. The growth of American dependence on imported oil was made dramatically clear by the disruption in world oil supply caused by the Arab oil embargo of 1973-1974. The embargo prompted Congress to pass the Emergency Petroleum Allocation Act of 1973, implementing a number of policies designed to reduce U.S. dependence on foreign oil. The act also created the 588

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Federal Energy Administration (FEA) to implement and enforce the legislation and to formulate policies to reduce dependence on oil imports. A number of the FEA’s recommendations, developed in 1974, were passed into legislation in the Energy Policy and Conservation Act of 1975. These statutes and regulatory policies laid the foundation for a continuing federal role in the domestic oil and natural gas industries. American oil companies had been developing oil and gas reserves in the Middle East since the mid-1930’s. By the mid-1950’s, American domestic demand began to outpace domestic oil production. At the end of 1955, imported oil accounted for less than 15 percent of America’s domestic energy consumption, but the figure was growing rapidly. As the American economy began to demand increasing amounts of petroleum, the relationship between the United States and the Middle East continued to grow. In 1972 and 1973, oil production in the United States (excluding Alaska) declined by about 360,000 barrels each year. This came at a time when American demand for oil was increasing dramatically. The American population had increased 30 percent since 1950, but energy consumption had doubled. Almost all the increases in U.S. energy consumption were filled by oil imports. In 1970, foreign oil accounted for 22 percent of domestic consumption; by 1973, 36 percent. In 1970, the United States imported 3.2 million barrels of oil per day; by 1972, that figure had risen to 4.5 million barrels. In the summer of 1973, months before the Arab oil embargo, the United States was importing 6.2 million barrels of oil each day, largely from the Middle East. In 1971, federal control of oil and gas prices was instituted as part of the federally mandated general freeze on wages and prices. This action was a response to an inflation rate of nearly 5 percent per year. Although most of the price controls ended by 1974, continuing public disenchantment with oil and gas shortages and price increases meant that price controls on the domestic petroleum industry would continue in various forms until 1981. The members of the Organization of Petroleum Exporting Countries (OPEC) met in Kuwait City on October 16, 1973. The OPEC ministers decided to raise the price of a barrel of OPEC oil, which had become a measure of world oil prices, from $2.90 to $5.11. In January, 1974, OPEC raised the price again, to $11.65 per barrel. Many of the Arab oil-producing nations also had embargoed shipments of oil to the United States in October of 1973 in retaliation for U.S. support of Israel. The prospect of the exhaustion of domestic oil stocks, together with the Arab oil embargo, portended disaster for the American economy. On November 7, 1973, President Richard M. Nixon announced that if preventive measures were not taken, the American economy would soon fall 10 589

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percent short of its energy needs. Nixon called for Project Independence, a series of policies designed to eliminate U.S. dependence on imports by 1980. Many oil industry executives and policy experts believed the goal to be unrealistic. Nixon called for voluntary conservation of energy and lower thermostat settings, lower standards for air quality to aid factories and the auto industry, reduced highway speeds, acceleration of the building and licensing of nuclear power plants, incentives to increase the production of coal and lignite, a halt on changing utilities from coal to oil, increased oil production on the outer continental shelf, and increased production from the federal naval petroleum reserves. Although the coal, lignite, and nuclear power options were slowed by environmental concerns, in the next two years Congress passed legislation calling for a national 55 mile per hour speed limit and tax breaks for home insulation. Congress also passed legislation to speed up the Alaskan pipeline project. More comprehensive legislation was needed, however, to address the immediate problem of the shortage in petroleum supplies. As domestic oil supplies became scarce in late November, 1973, political action groups representing the independent and smaller refiners, transporters, and marketers called for the federal government to allocate limited crude oil stocks for the immediate future, a plan that would be designed to ensure fairness in crude oil stocks while also preserving competition. On November 27, 1973, Congress passed the Emergency Petroleum Allocation Act (EPAA). A primary goal of the EPAA was to aid vulnerable end-users of oil. This meant federally mandated allocations of crude and refined oil to small and independent domestic refiners, transporters, and marketers. This policy often meant that integrated companies with large crude oil stocks had to sell oil at controlled prices to their less-well-supplied competitors. The EPAA also continued the complex series of price controls on domestic oil and provided for gasoline rationing. To implement, administer, and enforce these policies, the EPAA authorized the president to create a federal energy agency. Accordingly, President Nixon created the Federal Energy Administration (FEA) to implement and enforce the provisions of the EPAA. The FEA also endeavored to develop a workable set of policies from the energy initiatives proposed in Project Independence. The FEA devised a number of proposals to reduce U.S. dependence on foreign oil and completed its report in November, 1974. Some of these proposals that would soon become federal legislation included higher fuel efficiency standards for automobiles, higher efficiency standards for electrical appliances, and standards for home and office insulation and heating and cooling equipment. 590

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Impact of Event Gerald Ford became president of the United States in August, 1974. He proposed federal decontrol of oil and natural gas prices in the hope that rising prices would spur domestic oil production. To maintain some control on oil prices, Ford proposed a Windfall Profits Tax. Ford also proposed large-scale development of coal mines, coal-fired power plants, and syntheticfuel plants. Ultimately, these plans were canceled or scaled down. Congress included some of Ford’s proposals in the Energy Policy and Conservation Act (EPCA) of 1975. Instead of decontrol of petroleum prices as Ford advocated, however, the EPCA continued the complex and controversial price controls on oil and gas. Federal allocation of domestic oil and natural gas continued as well. The FEA was given authority to implement and enforce the new regulations. The attempt to control prices and allocate oil and gas proved to be just as complex, controversial, and difficult as under the EPAA. The EPCA gave increased powers to the president to intervene in the domestic petroleum industry. The president could require power plants to use coal, if available, rather than oil; order the development of new coal mines; and further allocate and appropriate domestic stocks of oil and gas. The president could also order mandatory conservation measures and rationing of oil and natural gas. The EPCA required higher fuel efficiency standards for a host of products, including automobiles and electrical appliances. The EPCA required manufacturers of electrical appliances to label their products with information on their energy efficiency. The EPCA also mandated fuel-efficiency standards for automobiles that later became the Corporate Average Fuel Economy (CAFE) standards. The new standards established by the EPCA mandated that the average fuel efficiency of a new car would have to double over a ten-year period, from 13 miles per gallon to 27.5 miles per gallon. Another significant aspect of the EPCA was the establishment of the Strategic Petroleum Reserve (SPR), in which the federal government, together with the American oil companies, would establish reserve oil stocks for emergencies in the case of a future disruption in world oil supplies. The EPCA also called for U.S. participation in the International Energy Program, whereby Great Britain, Japan, West Germany, and the United States would all develop reserve systems that they could coordinate and share in the event of another oil supply disruption. The EPCA ratified American participation. President Jimmy Carter came into office in 1977 also committed to reducing American dependence on foreign oil. In April, Carter announced several goals, including a reduction of oil imports to one-eighth of total 591

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energy consumption by 1985. In an effort to reduce demand for energy, Carter proposed the Crude Oil Equalization Tax, which would have taxed oil at the wellhead, and instituted a new pricing system. The Carter Administration hoped that this new pricing system would let oil prices rise gradually to discourage consumption and reduce dependence on foreign crude oil. Carter also submitted to Congress the Department of Energy Organization Act; Congress approved the bill in August, 1977. The bill created the Department of Energy (DOE) and placed most of the previous energy agencies under the DOE umbrella, including the Federal Energy Administration, the Energy Resources and Development Administration, and the Federal Power Commission. Carter appointed James R. Schlesinger, the secretary of defense in the Nixon Administration, to be the first secretary of energy. The Iranian revolution of January, 1979, removed large amounts of petroleum from world markets, pushing prices up to $30 per barrel and bringing on a second oil price shock and supply disruption. OPEC used the opportunity to raise its prices. By December, 1979, the price was above $30 per barrel; in some spot markets, it was $45 per barrel. The whirlwind of congressional activity and executive actions taken during the Nixon and Ford administrations had done little to reduce American dependence on foreign oil. The complex set of energy regulations was of little help to President Carter in the crisis of 1978-1979. The American economy was still dependent on imported oil for nearly half of its energy consumption in the last years of the 1970’s. In the midst of the severe worldwide inflation of oil prices, pressure increased for the Carter Administration to decontrol U.S. prices. The ensuing price increases would, the government hoped, make domestic exploration economical. In April, 1979, Carter announced a phased process of decontrol of oil prices over thirty months. To satisfy consumers, Carter proposed a new tax on American oil companies that became the Windfall Profits Tax Act of 1980. Ronald Reagan assumed the presidency in 1981 strongly committed to reducing federal regulations. In his first month in office, Reagan formally ended the federal pricing system, lifting all the controls on oil and gas. The Reagan Administration also pledged to reevaluate the Department of Energy, which had become a political symbol of overregulation. President Reagan considered abolishing the DOE but finally decided to reduce its budget. It was not long after federal decontrol of prices occurred, however, that world oil prices began to fall. Beginning in 1981, world oil prices began a five-year deflationary trend. By 1983, oil prices had fallen to below $30 per 592

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barrel. Price deflation also reduced the political and economic threat of high prices and gasoline lines. As the American economy recovered from the oil shocks of 1973 and 1979, controversy over imported oil also abated. The Reagan Administration, previously concerned with removing federal hindrances to economic growth, took the opportunity to push through Congress a measure that increased the federal tax on gasoline by five cents. It was hoped that this act would check potential increases in consumption caused by falling prices while also raising revenue to meet mounting federal expenditures. Ironically, falling oil prices on the world markets in the early 1980’s resulted in large part from OPEC’s success in raising prices in the 1970’s. Higher prices made oil production in non-OPEC areas, such as the North Sea, Alaska, Mexico, and the southwestern United States, more economically feasible. The U.S. national economy still depended on foreign oil for approximately 25 percent of its petroleum requirements. Greater nonOPEC production, however, was creating a glut of oil on the world market, leading to price deflation. With the price of oil falling and supply on the rise, public and private alternative fuel programs became uneconomical. In 1981, the Reagan Administration slashed federal funding for solar energy programs as well as the Synthetic Fuels Corporation, established by Carter. American oil companies cut back their shale oil and coal gasification projects. In 1990 and 1991, the United States, under United Nations auspices, militarily intervened in a conflict involving Iraq, Kuwait, and Saudi Arabia. The action was motivated in part by a desire to keep Middle Eastern oil flowing to the United States, which still had not eliminated its dependence on foreign oil. Bibliography Bradley, Robert L. Oil, Gas, and Government: The U.S. Experience. Lanham, Md.: Rowman & Littlefield, 1996. Feldman, David Lewis. The Energy Crisis: Unresolved Issues and Enduring Legacies. Baltimore, Md.: Johns Hopkins University Press, 1996. Krueger, Robert B. The United States and International Oil: A Report for the Federal Energy Administration on U.S. Firms and Government Policy. New York: Praeger, 1975. Presents policy options considered in the 1970’s. Also contains brief but informative histories of federal and state regulation of the petroleum industry and of U.S. diplomacy with the oil-producing nations of the world. Melosi, Martin V. “Energy Intensive Society, 1945-1970” and “Scarcity Decade—1970’s.” In Coping with Abundance: Energy and Environment 593

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in Industrial America. Philadelphia: Temple University Press, 1985. These chapters give an excellent overview of the formation of energy policy, detailing the forces behind the growing federal regulation of the energy industries in the United States after World War II. Nash, Gerald D. United States Oil Policy, 1890-1964 Pittsburgh, Pa.: University of Pittsburgh Press, 1968. Although Nash’s work does not cover the 1970’s, it is a good source for readers seeking an introduction to the subject of public policy regarding the oil, coal, and natural gas industries. Sherrill, Robert. The Oil Follies of 1970-1980: How the Petroleum Industries Stole the Show (and Much More Besides). Garden City, N.Y.: Anchor Press/Doubleday, 1983. The best source for a detailed treatment of the politics of petroleum regulation in the 1970’s. Shows the ways in which the divergent segments of the American political economy shape energy policy. Vietor, Richard H. K. Energy Policy in America Since 1945: A Study of Business-Government Relations. New York: Cambridge University Press, 1984. This work covers the oil, coal, and natural gas industries and their regulatory relationships with federal and state governments. Contains useful and detailed analysis of the issues of imports, price control, and allocation. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Covers many aspects of petroleum issues, including actions and policies of oil producing and consuming nations, international relations, and the business strategies of oil firms. Best in its treatment of the international aspects of the petroleum industry, this work also has concise coverage of domestic regulatory policy. Bruce Andre Beaubouef Cross-References The Supreme Court Decides to Break Up Standard Oil (1911); The Teapot Dome Scandal Prompts Reforms in the Oil Industry (1924); Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska (1967); Arab Oil Producers Curtail Oil Shipments to Industrial States (1973); The Alaskan Oil Pipeline Opens (1977).

594

THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 IS PASSED The Employee Retirement Income Security Act of 1974 Is Passed

Category of event: Labor Time: September 2, 1974 Locale: Washington, D.C. By establishing fiduciary, funding, vesting, and disclosure rules and plan termination insurance, ERISA attempted to protect employees’ rights to retirement and other benefits Principal personages: Jacob Javits (1904-1986), a Republican senator from New York, cosponsor of pension reform legislation Russell B. Long (1918), a Democratic senator from Louisiana, chairman of the Senate Finance Committee Harrison Williams (1919), a Democratic senator from New Jersey, cosponsor of pension reform legislation Richard M. Nixon (1913-1994), the president of the United States, 1969-1974 John H. Dent (1908-1988), a Democratic congressman from Pennsylvania, chairman of the General Subcommittee on Labor Gerald Ford (1913), the president of the United States, 19741977 Ralph Nader (1934), a consumer advocate Summary of Event On September 2 (Labor Day), 1974, President Gerald Ford signed the Employee Retirement Income Security Act of 1974 (ERISA) into law. 595

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ERISA established complex rules concerning employee benefit plan disclosure, fiduciary responsibility, funding, and vesting. Vesting refers to an employee’s nonforfeitable right to a pension, a right earned, for example, after a fixed number of years of service. The law also established pension plan termination insurance and the Pension Benefit Guaranty Corporation. ERISA was the culmination of eight years of investigations, hearings, and legislative proposals that responded to reports of abuse in the private pension and group insurance system, particularly with respect to the absence of vesting and funding standards in some plans. ERISA mandated practices that had become increasingly common among large corporate plans. The law’s supporters thus included a wide range of interests, such as the American Bankers’ Association and the United Auto Workers union. ERISA was moderate in scope and did not include certain reforms, such as the mandating of private employee benefit coverage for everyone in the work force, that were advocated at the time by Ralph Nader and other public interest advocates. The American Express Company adopted the first pension plan in the United States in 1875. By 1940, more than four million American employees were covered by private pensions. The Revenue Act of 1942 allowed a company to receive a guarantee that pension contributions would be tax deductible, and this provision encouraged growth in coverage. The War Labor Board also encouraged growth during World War II by exempting employee benefit plans from wage freezes. A similar provision was made during the Korean War. Furthermore, in 1948 the Seventh Circuit Court of Appeals upheld a ruling in a case involving the Inland Steel Company that pensions are mandatory subjects of collective bargaining. This decision opened the door to collective bargaining by unions for employee benefits. Pension assets rose from $2.4 billion in 1940 to $52 billion in 1960. By 1970, more than twenty-six million American employees were covered by private pensions. In 1958, the Welfare and Pension Plan Disclosure Act (WPPDA) established disclosure requirements for employee benefit plans. The WPPDA was amended in 1962 to establish criminal sanctions. The WPPDA’s disclosure requirements, however, were limited in scope. In 1963 and 1964, pension plans gained public attention when the Studebaker factory in South Bend, Indiana, closed. About forty-five hundred Studebaker employees under the age of sixty received only 15 percent of the retirement benefits they had earned, and many received no benefits at all. President John F. Kennedy had appointed a Committee on Corporate Pension Funds in 1962, and in 1965 the committee recommended stricter standards for plan funding and vesting of employees’ pension benefits. This 596

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recommendation led to a 1968 House bill that would have established fiduciary standards for administrators of employee benefit plans, but the bill died. In a message to Congress on December 8, 1971, President Richard M. Nixon proposed legislation to establish vesting and fiduciary standards and to permit individual retirement accounts (IRAs). A House Banking and Currency Committee task force investigated pension reform that year as well. In 1972, the National Broadcasting Company encouraged popular support for pension reform legislation by airing a television news documentary, Pensions: The Broken Promise, that depicted abuses in the pension system. The House Ways and Means Committee, chaired by Wilbur Mills, held hearings in 1972 on H.R. 12272, the Nixon Administration’s bill. H.R. 12272 included provisions on disclosure, fiduciary responsibility, and vesting, but not on funding and plan termination insurance. The most controversial part of the bill was its proposal for increasing the limits on the tax deductibility of pension benefits for self-employed individuals and their employees (Keogh or HR 10 plans) and IRAs. More than twenty national and local bar associations and the American Medical Association testified in favor of the Keogh plans and IRAs. The American Federation of LaborCongress of Industrial Organizations (AFL-CIO) strongly opposed the Nixon bill because of these provisions. The bill died in the House. In September, 1972, the Senate Labor and Public Welfare Committee, chaired by Harrison Williams, reported a bill that would have regulated pension plans, but the bill died when Senator Russell Long argued that it was primarily tax legislation and so was the province of his Senate Finance Committee. The Senate Finance Committee reported the bill out only after removing its provisions concerning vesting, funding, and termination insurance. By early 1973, public support for pension reform was widespread, and jurisdictional disputes were to be swept aside. Congressman Carl Perkins, chairman of the Education and Labor Committee, testified that he had received several thousand letters in support of pension reform. Later that year, Ralph Nader and Kate Blackwell published You and Your Pension, a book that further encouraged popular support for pension reform by providing examples of insufficiently funded plans, the absence of vesting rules, and excessively complex plan provisions. In September, 1973, the Senate Labor and Public Welfare Committee reported a bill cosponsored by Jacob Javits and chairman Harrison Williams. At the same time, the Senate Finance Committee sponsored a complementary bill. The two bills were merged into S. 4, which passed the Senate. The bill set minimum fiduciary, funding, portability, and vesting 597

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standards, established plan termination insurance, established IRAs, and extended limits on Keogh plans. (Portability refers to allowing employees to transfer pension assets to a new employer or to a centralized trust fund when they change jobs). Weeks later, in October, 1973, the House Education and Labor Committee reported H.R. 2, which omitted S. 4’s provisions on portability, Keogh plans, and IRAs but was similar to it in other respects. During 1972 and 1973, the House Ways and Means Committee held hearings concerning H.R. 12272; the Senate Labor and Public Welfare Committee held hearings concerning S. 4; and the General Subcommittee on Labor, chaired by John H. Dent, held hearings concerning H.R. 2. In the course of these hearings, organized labor gave only mixed support to pension reform legislation. For example, a representative of the Amalgamated Clothing Workers Union testified that jointly sponsored labormanagement trusts should be exempt from retirement legislation. In fact, industry groups such as the national Chamber of Commerce and the American Bankers’ Association, along with Towers, Perrin, Foster, and Crosby, a consulting firm, gave stronger support to the proposed vesting, disclosure, and fiduciary rules than did the AFL-CIO. The AFL-CIO did not testify during the S. 4 and H.R. 2 hearings. The United Steelworkers, the United Auto Workers, and other industrial unions, along with some craft unions, did not support the proposed legislation, especially its termination insurance provisions, probably because pension funds in the steel and auto industries were underfunded. In testimony concerning H.R. 2, Ralph Nader excoriated the labor movement for its weak support of pension legislation. In February, 1974, the House Ways and Means Committee passed a revised H.R. 2 bill that included improvements to Keogh plans and established IRAs. The House-Senate conference committee reported a final compromise version of H.R. 2 and S. 4 in August, 1974. The conference committee’s bill passed the Senate unanimously, 85-0. In the House, only two representatives voted against ERISA. President Ford signed the bill on September 2, 1974. Impact of Event ERISA established new rules on disclosure, vesting, eligibility, funding, and fiduciary responsibility. It established individual retirement accounts and increased the amount that self-employed individuals could contribute to their own pension plans. It established limits on contributions and benefits to highly paid individuals and restated the Internal Revenue Code’s rules on integration of pensions with Social Security benefits. It also established the Pension Benefit Guaranty Corporation and a $1 per participant tax on single-employer plans to cover the newly created plan termination insurance. 598

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With respect to disclosure, ERISA required that plan sponsors (both single employers and multiemployer trusts that sponsor benefit plans) provide participants with a summary of the formal, relatively technical, plan document that governs their pension plan. The summary, called a summary plan description, was required to be written in a manner calculated to be understood by the average plan participant. ERISA required that each plan administrator produce a detailed annual report that, in the case of pension and profit sharing plans, was required to be audited by a certified public accountant. It also required plan administrators to provide each plan participant with a summary of this annual report. Furthermore, the law required that the plan administrator provide an estimate of a participant’s benefit upon request. With respect to eligibility, ERISA required that plans could not require more stringent eligibility requirements than participants being twenty-five years of age or older, with at least one year of service, although with full immediate vesting, plans could require three years of service. Plans could no longer exclude employees because they were too old unless those employees began work within five years of the normal retirement age for the plan. With respect to vesting, ERISA allowed plan participants to vest according to one of three rules: full vesting at ten years, the five to fifteen rule (25 percent vesting at five years of service increasing by 5 percent in the following five years and by 10 percent for five more years), and the rule of forty-five (50 percent vesting when the sum of age and years of service equals forty-five, increasing 10 percent per year thereafter). It also required that pension plans’ normal form of benefit be a 50 percent joint and survivor benefit, that is, a pension amount at normal retirement age that has been actuarially reduced to provide a 50 percent benefit to the participant’s spouse in the event of the participant’s death. With respect to funding, ERISA required that plans fully fund the cost accruing each year and that unfunded past service liabilities be funded over thirty years, with the exception of preexisting past service liabilities, which could be funded over forty years. With respect to fiduciary standards, ERISA required that plans name a fiduciary and that the named fiduciary and any cofiduciaries must act exclusively for the benefit of plan participants. The law required that fiduciaries act as would a prudent person in like capacity. The law also required that fiduciaries diversify assets and prohibited the exchange of property or lending of money between a plan and a party-in-interest, defined as a fiduciary or the relative of a fiduciary, a person providing services to a plan, an employer, or a related union. With respect to Keogh plans and IRAs, ERISA raised the tax-deductible amounts that a self-employed person could contribute to $7,500, or 15 599

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percent of earnings if less. It also allowed individuals not otherwise covered by a pension plan to establish an IRA. With respect to limitations on contributions and benefits, it limited contributions to profit sharing plans to $25,000 or 25 percent of compensation, whichever was less, and limited benefits under pension plans to $75,000 or 100 percent of final average earnings, whichever was less. Both limits were indexed for inflation and were intended to prevent highly paid individuals from taking undue advantage of tax deductions for qualified pension plans. Several writers, including Nader and Blackwell, raised important concerns about ERISA’s efficacy. One characteristic of America’s private system of pension and other benefits is that coverage is skewed toward higher-paid employees and employees of large firms. For example, in 1978, those whose preretirement income was more than 43 percent in excess of the median worker’s had pensions worth 93 percent more than the median amount, as pointed out by Teresa Ghilarducci. Similarly, according to another study, in 1988, 65 percent of workers in firms with more than five hundred employees were covered by pension plans, while only about 12 percent of workers in firms with fewer than twenty-five employees were covered. By failing to mandate benefits and doing little to tighten restrictions on offsetting Social Security benefits from pension benefits (called integration), ERISA did little to alleviate the skew in coverage toward higher-paid workers. The additional disclosures and plan termination insurance that ERISA required were costly, and administrative costs associated with compliance with ERISA may have had a depressing effect on plan adoption rates, especially among small firms. Although coverage rates of private pension plans grew from 15 percent of the work force in 1940 to 45 percent in 1970, the coverage rate remained constant at about 45 percent from 1970 to 1987. In particular, coverage among firms with fewer than twenty-five employees declined by about 15 percent from 1979 to 1988. ERISA opened a floodgate for regulation of employee benefit plans. From 1974 through 1992, fifteen laws regulating employee benefit programs were passed. For example, the Tax Equity and Fiscal Responsibility Act of 1982 reduced the limitations on contributions and benefits, the Retirement Equity Act mandated further spousal benefits, and the Tax Reform Act of 1986 reduced the minimum years of service for vesting to five. The premium required for plan termination insurance increased dramatically, twentyfold for some plans. As of 1993, approximately half of the American work force lacked private pension coverage, and much of the remainder expected only modest benefits from the private pension system. 600

The Employee Retirement Income Security Act of 1974 Is Passed

Bibliography Beam, Burton T., Jr., and John J. McFadden. 5th ed. Employee Benefits. Chicago: Dearborn Financial Publications, 1998. Ghilarducci, Teresa. Labor’s Capital: The Economics and Politics of Private Pensions. Cambridge, Mass.: MIT Press, 1992. The best available analysis of the American pension system and its institutional context. The book is critical of the American employee benefit system and recommends several directions for reform. Ippolito, Richard. Pensions, Economics, and Public Policy. Homewood, Ill.: Dow Jones-Irwin, 1986. A quantitative study of public policy on pensions by an official of the Pension Benefit Guaranty Corporation. Excessive emphasis on some unions’ interest in plan termination insurance as a factor in ERISA’s evolution. Mamorsky, Jeffrey D. Employee Benefit Law: ERISA and Beyond. New York: Law Journal Seminars-Press, 1980. The 1992 version is by a prominent pension attorney. The best available legal analysis of ERISA and subsequent employee benefit plan regulation. Includes discussion of pension and profit sharing plans. Nader, Ralph, and Kate Blackwell. You and Your Pension. New York: Grossman, 1973. Written by the country’s leading consumer advocate and published one year before ERISA was passed. Includes illuminating anecdotes and recommendations for pension reform, many of which were adopted by Congress. The book was surprisingly well received by the pension community. Rosenbloom, Jerry S. ed. The Handbook of Employee Benefits. Homewood, Ill.: Dow Jones-Irwin, 1984. Good introduction to practical administrative tasks associated with implementing ERISA and subsequent employee benefit regulation. Turner, J. A., and D. J. Beller, eds. Trends in Pensions 1992. Washington, D.C.: U.S. Government Printing Office, 1992. Includes useful, up-todate statistical data about pensions. Mitchell Langbert Cross-References The Wagner Act Promotes Union Organization (1935); The Social Security Act Provides Benefits for Workers (1935); The Taft-Hartley Act Passes over Truman’s Veto (1947); The Landrum-Griffin Act Targets Union Corruption (1959).

601

CONGRESS PROHIBITS DISCRIMINATION IN THE GRANTING OF CREDIT Congress Prohibits Discrimination in the Granting of Credit

Categories of event: Finance and consumer affairs Time: October 28, 1975 Locale: Washington, D.C. The Equal Credit Opportunity Act passed in 1975 included policies to eliminate credit discrimination and eased the ability of women and minority group members to get loans Principal personages: William Brock (1930), a senator from Tennessee Joe Biden (1942), a senator from Delaware William Proxmire (1915), a senator from Wisconsin Jake Garn (1932), a senator from Utah Parren J. Mitchell (1922), a congressman from Maryland Lindy Boggs (1916), a congresswoman from Louisiana Patricia Schroeder (1940), a congresswoman from Colorado Frank Annunzio (1915), a congressman from Illinois Fernand J. St. Germain (1928), a congressman from Rhode Island Summary of Event Portions of the Equal Credit Opportunity Act were enacted in 1974. The intent of this act was to protect individuals applying for credit from facing discrimination based upon gender and marital status. In 1975, the act was amended several times to prohibit credit discrimination based on race, color, national origin, religion, and age. The prohibition on age discrimination has one exception, in that an individual applying for credit must have 602

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reached the age of majority in his or her home state and must be deemed competent to sign a legally binding contract. On January 29, 1975, Senator William Brock proposed a bill in Congress to amend the Equal Credit Opportunity Act to ban age discrimination. Further amendments were proposed on June 9, 1975, when Senator Jake Garn suggested that the act encompass not only consumer loans but also all consumer lease agreements, since they were also forms of consumer credit. Later in the month, Senators William Proxmire and Joe Biden proposed further legislation related to consumer leasing requiring lenders to disclose all terms of leases to borrowers. On June 12, 1975, senators Biden and Proxmire proposed a bill encompassing criteria to prohibit consumer credit discrimination based upon the following personal characteristics: race, color, religion, national origin, political affiliation, sex, marital status, receipt of public assistance, or exercise of rights under this act. Both the original act and its amendments applied only to individuals applying for consumer credit, not business credit. Credit is the process of obtaining funds from a lending institution in order to purchase goods and services. The ability of a consumer to obtain credit substantially raises his or her standard of living, as items can be obtained in the present and can be paid for with future income. The creditor (lender) has the ultimate authority as to whom will be granted credit and thus who will have this opportunity. Traditionally in American society, those deemed by lenders as worthy credit applicants were white and male. There was some logic to this in the fact that prior to the 1960’s a majority of the better-paid work force with greater likelihood of repaying loans fell into these two categories. The composition of America’s work force began to change drastically in the 1960’s as women and minority group members began to enter the work force in large numbers and take jobs with better pay, more responsibility, and greater longevity. This change increased the ability of women and minorities to derive incomes and to be able to repay their debts. Old paradigms die hard, however, and lenders were conditioned to believe that these groups were poor credit risks. Congress recognized the social changes taking place and the civil unrest erupting during this time period and enacted various legislation to guarantee equal opportunity. Equality in the process of receiving credit was a relatively low priority, so legislation regarding it was proposed relatively late. The Federal Reserve Board was the primary regulator involved in monitoring banks’ compliance with this act. Federal Reserve Regulation B was incorporated into the guidelines of banks and was monitored through bank examinations. This regulation codified the intent of the act. 603

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Creditors are in the business of assessing and managing risk, or the chance of loss. Creditors need to assess five different things when evaluating a consumer credit request: character (will the borrower pay), capacity (can he or she pay), conditions (anything particular or unique to the loan request), capital (the borrower’s accumulated wealth), and collateral (the security for the loan). A prudent lender would apply these “five C’s” of credit to make a credit decision. These are the criteria that theoretically determine the creditworthiness of a borrower; factors such as age, sex, race, national origin, and religion are not accurate predictors of a borrower’s willingness and ability to repay a debt and therefore should not be part of the lending decision. Passage of the amended Equal Credit Opportunity Act on October 28, 1975, thus reflected Congress’ desire to exclude irrelevant factors from lending decisions. Impact of Event The passage of the Equal Credit Opportunity Act affected all parties involved in the granting and monitoring of consumer credit. This act was directly related to consumers and their attempts to obtain credit. It stipulated that creditors could not ask the sex, race, color, religion, or national origin of an applicant for credit. Loans using real estate as collateral or for home purchases were exempt because of dower rights of married applicants and government monitoring of other categories for fair housing. The law also established that no individual can be discouraged from applying for credit, each individual is entitled to have credit files maintained in his or her own name, a spouse is not required to sign a loan agreement unless he or she would be responsible for the credit (with the exceptions related to real estate mentioned above), and poor credit obtained with a former spouse could not be used against a borrower who had established good credit in his or her own name. Creditors may ask about obligations to pay child support or alimony and if applicants are receiving alimony, child support, or public assistance. This information did not have to be revealed and creditors were not allowed to use receipt of public assistance as a reason for denial of credit. In the case of female applicants, questions regarding types of birth control methods used and plans to have children were deemed illegal. Creditors had the right to determine whether applicants had reached the age of majority but could not deny a consumer credit because of his or her inability to obtain life insurance. Any other discrimination based on age was prohibited. In the event that a consumer was denied credit, the Equal Credit Opportunity Act spelled out the procedures that must be followed. The lender had thirty days from the date of the application to inform the borrower of the 604

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decision on the loan. The creditor had to provide the borrower with the following information in writing: the action that had been taken (acceptance of the agreement, denial, or change in the terms), a statement of the consumer’s rights, the name and address of the federal agency responsible for credit regulation, and whether information was obtained through a credit reporting agency. Consumers were not the only parties affected by the passage of this legislation. Everyone in the business of granting credit to consumers was forced to comply with this legislation. The process of conforming began when a lender started to discuss the process of credit with an applicant. Lenders could not use sexist, racist, or other types of discriminatory language that might discourage or offend applicants applying for credit. Credit applications reflected the impact of this law. They included statements that the lender did not discriminate based on the disallowed factors. Individuals involved in the credit application process needed to have proper training to ensure that they were meeting the requirements of the law. Lenders needed not only proper training but also clerical staff to support the paperwork generated by the law, for example, written denial notices that had to be sent out on time. The act added direct costs to lenders through the paperwork, training, and compliance measures required. The paybacks for these added costs have been better customer relations, a more positive image of business, and the possibility of entering new and profitable markets as new groups were able to obtain credit. The passage of any regulation requires monitoring by appropriate regulators. The Equal Credit Opportunity Act (ECOA) covers a vast spectrum of businesses, with different regulators each responsible for their own area. Commercial banks were regulated either by the Comptroller of the Currency or the Federal Reserve Board. Savings and loans were regulated by the Federal Home Loan Bank Board, and credit unions were regulated by the National Credit Union Association. Individual states also had responsibilities in ensuring compliance with the law. Each regulator had various mechanisms to enforce the law. For example, a major portion of a commercial bank’s examination dealt with consumer credit compliance. Bank examiners were often more concerned with loans that were denied then with loans that were made. Regulators have used compliance with ECOA and other consumer regulations in deciding whether to allow banks to merge with or acquire other banks. Prior to 1986, small business owners were not protected under the Equal Credit Opportunity Act. Small businesses are viewed as high credit risks. Statistics show that more than half of new small businesses will fail within their first few years, with the most frequent cause of small business failure 605

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being inadequate financing brought about by inadequate cash flow. Applicants for small business loans commonly were bad at providing the following information to the lender: cash flow forecast, a clearly stated purpose for the loan, the amount of the loan, and the time frame and source of repayment. Lenders often required a loan proposal including the above information and a detailed business plan. Most small businesses and their owners are one and the same. Even though loan requests are for business purposes, loans are made to individuals. Congress decided to extend equal credit opportunity to business owners as well as consumers. On March 19,1985, Parren J. Mitchell and Lindy Boggs proposed a bill to the House of Representatives to amend the Equal Credit Opportunity Act to include owners of small businesses. The bill particularly focused on small business loans to women and minority group members. Congresswoman Patricia Schroeder, Cochair of the Congressional Caucus on Women’s Issues, presented details regarding the discrimination women experienced in obtaining credit to finance small businesses. Her arguments included the fact that women were rapidly entering the work force as the owners of their own companies and that women were playing a critical role in the creation of jobs. Congressmen Frank Annunzio and Fernand J. St. Germain also played critical roles in the passage of this amendment through their work as members of the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance, and Urban Affairs. St. Germain remarked that this bill was special to him because he had floor managed the original act in 1974. The amendment exempted large businesses from protection. All banks, savings and loans, credit unions, department stores, credit card issuers, and car and appliance dealers had to comply with this regulation and act without discrimination in their credit decisions regarding loans to small businesses. The Equal Credit Opportunity Act had major effects on those involved in granting, receiving, and regulating consumer credit. The 1986 amendments extended those effects to those involved with loans to small businesses and to the businesses themselves. The economic environment of the late 1980’s and early 1990’s favored small businesses, and women and minority group members were the fastest-growing segments of smallbusiness owners. This was brought about in large part by the Equal Credit Opportunity Act amendments prohibiting credit discrimination and increasing opportunities for all borrowers. Bibliography Beares, Paul. “Regulation of Consumer Credit.” In Consumer Lending. Washington, D.C.: American Bankers Association, 1987. An excellent 606

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book dealing with all phases of consumer credit. Written from a banker’s perspective, but easy reading for the layperson. Discusses in detail the process of consumer credit, the five C’s of credit, and consumer credit management. A must for all consumer lenders. Board of Governors of the Federal Reserve. A Guide to Business Credit and the Equal Credit Opportunity Act. Washington, D.C.: Author, 1986. A twelve-page brochure explaining the requirements to obtain a small business loan. Lists federal enforcement agencies and alternative sources of capital. Burda, Joan M. An Overview of Federal Consumer Law. Chicago: American Bar Association, 1998. Practical guide prepared by the American Bar Association. Cole, Richard H. “Regulation of Consumer Credit.” In Consumer and Commercial Credit Management. 8th ed. Homewood, Ill.: Irwin, 1988. Chapter 6, “Regulation of Consumer Credit,” goes into consumer lending regulation in detail. The book is an excellent reference on both consumer and business credit. Federal Reserve Bank of Philadelphia. How the Equal Credit Opportunity Act Affects You. Philadelphia: Author, 1986. Puts the ECOA into perspective for the average individual. Describes who ECOA applies to, lenders’ responsibilities, what to do in the case of errors, and consumer remedies. A straightforward publication that is easy to understand. Sirota, David. “Other Government Activities in Real Estate Finance.” In Essentials of Real Estate Finance. Chicago: Real Estate Education Company, 1992. This chapter lists all federal government regulations pertaining to residential real estate financing. The book in general covers all aspects of consumer real estate finance. An excellent reference for all mortgage lenders. U.S. Congress. House. Committee on Banking, Finance and Urban Affairs, Subcommittee on Consumer Affairs and Coinage. To Amend the Equal Credit Opportunity Act. 99th Congress, 2d session, 1986. House Document 1575. Government hearings and testimonies amending the ECOA to include small businesses. Includes arguments pertaining to the amendment from both opponents and proponents. U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs, Subcommittee on Consumer Affairs. Equal Credit Opportunity Act Amendments and Consumer Leasing Act—1975. 94th Congress, 1st session, 1975. Summary of the legislation and discussions prior to enacting the ECOA. Includes the bills proposed in Congress and testimony regarding them. William C. Ward III 607

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Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); Congress Passes the Equal Pay Act (1963); The Civil Rights Act Prohibits Discrimination in Employment (1964); Congress Passes the Consumer Credit Protection Act (1968); Congress Passes the Fair Credit Reporting Act (1970); Congress Deregulates Banks and Savings and Loans (1980-1982); Bush Responds to the Savings and Loan Crisis (1989).

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JOBS AND WOZNIAK FOUND APPLE COMPUTER Jobs and Wozniak Found Apple Computer

Category of event: Foundings and dissolutions Time: April 1, 1976 Locale: Santa Clara Valley, California In 1976, Steven Jobs and Stephen Wozniak founded Apple Computer, Inc., which became the world’s second-largest manufacturer of personal computers Principal personages: Steven Jobs (1955), a cofounder of Apple Computer Stephen Wozniak (1950), a cofounder of Apple Computer Mike Markkula (1942), a former Intel marketing manager appointed as Apple’s first chairman in May, 1977 Michael Scott (1943), the first president of Apple Computer John Sculley (1939), a business executive who joined Apple Computer in 1983 and later became chief executive officer Summary of Event Apple Computer was officially founded on April 1, 1976, by twentyone-year-old Steven Jobs and twenty-six-year-old Stephen Wozniak. Their initial idea was to assemble computers for their friends. They did not realize the potential that their ideas had to revolutionize the personal computer industry. Ultimately, their goal became making computer technology widely accessible to the mass population. These entrepreneurs recognized that most consumers at that time saw computers as too expensive and too complex to use. Jobs envisioned the firm offering products that contributed to human efficiency as much as had the electric typewriter, the calculator, and the photocopy machine. Jobs and Wozniak were graduates of Santa Clara’s Homestead High 609

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School and began collaborating in 1976 at the Home Brew Computer Club, a group of young computer enthusiasts located in Palo Alto, California. Wozniak was a superior product engineer and designer, while Jobs had a grasp of the demands of the marketplace. They designed their first machine in Jobs’s bedroom and used $1,300 from the sale of Jobs’s Volkswagen and Wozniak’s scientific calculator to assemble their first working model in Jobs’s parents’ garage. They chose Apple as the name for their venture as conveying a nonthreatening yet high-technology image. The name also recalled Jobs’s fond memories of time he spent on an Oregon farm. Jobs and Wozniak’s original plan was to limit production to circuit boards. After Jobs’s first sales call yielded an order for fifty units, they rethought their strategy and decided to offer fully assembled microcomputers. The first model, the Apple I, was introduced and sold without a monitor, keyboard, or casing, at a price of $666. It was the first single-board computer with on-board read-only memory (ROM), which told the machine how to load other programs from an external source, and with a built-in video interface. Orders for their “personal computer,” mainly from hobbyists, soon reached six hundred units. Jobs and Wozniak now faced the problem of improving the original model without sacrificing its key selling features, its simplicity and compactness. Their efforts resulted in the introduction of the Apple II, the first fully assembled, programmable microcomputer that did not require that users know how to solder, wire, or program. The Apple II featured considerable versatility and inspired numerous independent firms to develop third-party add-on devices and software programs. The resulting software library soon included more than ten thousand programs ranging from games to sophisticated business applications. Demand soon outstripped the founders’ ability to produce the machine. They turned to Mike Markkula, who had been a marketing manager at Intel, a fast-growing manufacturer of integrated circuits. Markkula contributed at least $91,000 to the company (by some estimates, as much as $250,000), secured a line of credit with the Bank of America, raised over one-half million dollars from venture capitalists, and was named chairman of the company in May, 1977. One month later, Michael Scott was brought in as president of the firm. Markkula wrote Apple’s first business plan. Its objectives included capturing a market share at least twice that of the nearest competitor, realizing at least 20 percent pretax profits, and growing to $500 million in annual sales within ten years by continuing to make significant contributions to the home computer industry. In addition, the plan called for the establishment and maintenance of a corporate culture that was conducive to personal growth and development for the firm’s employees. The plan also 610

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called for an “easy exit” for its founders within five years, should they wish to disassociate themselves from the enterprise. The firm’s strategy called for continual marketing of peripheral products for the basic computer so as to generate sales equal to or greater than the initial computer purchase, the allocation of funds for research and development to guarantee technological leadership, and the ability to attract and retain outstanding personnel. The plan called for initially targeting the hobbyist market, as a stepping-stone to wider distribution. The company also sought to refine manufacturing processes to reduce costs. Apple computers were to be designed and marketed as more economical than a dedicated system in specific applications, even though a particular user might not use all the features of the computer. By the end of 1977, Wozniak had improved substantially upon the original model by adding a keyboard, a color monitor, and expansion capabilities for peripheral devices. These features gave the new model, the Apple II, considerable flexibility and enticed a number of companies to develop software programs for the company, as well as a plethora of add-on devices. By 1980, with the help of Regis McKenna, a well-respected public relations expert in Silicon Valley, the California center for computer technology, Apple had sold more than 130,000 units. Revenues grew from less than $8 million in 1978 to $117 million. The company went public in 1980 with one of the largest stock offerings in history, underwritten in cooperation with Morgan Stanley, Inc. The first day of trading took Apple stock from the underwriters’ price of $22 per share to $29, bringing the market value of Apple to $1.2 billion. The Apple II Plus model did not fare as well as its predecessors. The Apple III, aimed at the professional market, was hampered by production problems that resulted in a recall of some units. These problems and the attention required to solve them offered International Business Machines (IBM) an opportunity to introduce its long-awaited entry in the personal computer market. The problems with the Apple II Plus and Apple III models were at least partially responsible for the firm’s first major managerial shake-up. Apple president Michael Scott fired forty employees. Scott was then dismissed by Markkula, who became president. Jobs assumed Markkula’s former position as chairman. Meanwhile, Wozniak was injured in 1981 and took a leave of absence from the firm. After his recovery, Wozniak founded an organization dedicated to fostering a spirit of cooperation among people. He expressed an interest in returning to Apple in a trouble-shooting capacity, with a mission to restore the spirit that led Apple to its early successes. 611

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In January, 1983, Jobs announced the introduction of the Apple IIe, a successor to the Apple II Plus. He simultaneously announced the introduction of Lisa, the first of a generation of computers aimed at the business market. Lisa incorporated many of the technological advances to date and added several unique features, including the first hand-held “mouse” input device. This mechanism allowed the user to execute commands by invoking a series of user-friendly “menus” by moving the mouse and clicking buttons rather than by typing commands. This innovation also allowed the user to more easily produce high-quality graphics that previously would have required a complex series of keystrokes. Computer novices could now master use of the computer in a matter of minutes, rather than the weeks mastery had taken in the past. As the company evolved, its approach to management changed dramatically. Realizing that selling computers had become a more complex marketing problem, Jobs sought help. Computers no longer would sell themselves on the basis of their technological innovations. In April, 1983, perceiving that marketing expertise was lacking within the firm, Jobs recruited John Sculley from PepsiCo. The move was controversial given that Sculley had developed his reputation selling soft drinks in a mature market, an environment very unlike the growth industry of personal computers. Some foresaw a conflict of corporate cultures between the freewheeling style of Silicon Valley and the more traditional style that Sculley embodied. Although an outsider, Sculley brought marketing skills to Apple that had been missing. Impact of Event In 1984, Apple introduced the Macintosh. This model, dubbed the computer “for the rest of us,” incorporated a graphical user interface inspired by Xerox’s Alto Computer. Macintosh was developed for the business (focusing on productivity and desktop publishing) and education markets. Its compact design and ease of use caught the attention of the market, though the original models were criticized for lacking the computing power required for some business applications. After a series of modifications and upgrades, the computer gained widespread acceptance. In 1985, after a series of tumultuous conflicts with Sculley and Apple’s board of directors, Jobs resigned his position, closing the chapter on Apple’s origin and founders. Jobs later formed his own firm, Next, Inc., dedicated to providing sophisticated workstations for the education markets. By 1986, with the introduction of the Mac Plus and the Laserwriter printer, Apple had begun to make significant inroads into the business 612

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market. The company also embarked on a cost- and price-reduction program, allowing it to sell aggressively to large businesses, a historically weak market for Apple. Combining traditional computer applications such as word processing and spreadsheets with pioneering concepts such as desktop publishing, three-dimensional computer-assisted design, and interactive multimedia tools (with text, animation, and sound) carried the Apple tradition for innovation forward. Apple’s unique approach to personal computing altered the manner in which computer manufacturers compete. Apple pioneered the concept of integrating hardware and software to offer new possibilities. For example, integration of high-resolution displays with scalable fonts (alphanumeric characters that could be printed in a variety of sizes) and graphics capabilities allows people to create sophisticated documents on their personal computers. Through the integration of a microphone and a CD-ROM drive with specialized software, people could now work with sound, video, and animation. Most other computer manufacturers could not integrate hardware and software as expediently because they did not manage the software development for their systems. Most, instead, licensed the same system software (MS-DOS) from the same company (Microsoft). As a result, many of their products were indistinguishable and companies often competed solely on the basis of price. Manufacturers of “clones” of IBM computers set off price wars in the hardware arena. Although Apple lowered prices to remain competitive, much of its sales growth has come through product innovation. In a surprising change in direction, given the maverick style of the firm’s beginnings, strategic partnerships became increasingly important for Apple. The company collaborated with Sony in introducing the Macintosh Powerbook notebook computer, and in 1990 Apple announced that it was working with Sharp on a pen-based group of products to include electronic books and communication devices. In 1991, in a move that shocked the computer industry, Apple and rival IBM announced a joint venture to develop new software, operating systems, and hardware that would allow easier integration of the products of the two firms. Apple Computer rose from origins in a garage to become the secondlargest manufacturer of personal computers, behind IBM. The company’s Macintosh line became known for its user friendliness and superior graphics capabilities. Although some significant product features have been mimicked by competing firms, Apple has successfully redefined how general users view personal computing. As a result of planning and the vision of Jobs and Wozniak in Apple’s early years, personal computing has become accessible to the general population. Through a continual series of 613

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product innovations, the firm has continued to redefine how people process and transmit information. Bibliography Levering, Robert, Michael Katz, and Milton Moskowitz. The Computer Entrepreneurs: Who’s Making It Big and How in America’s Upstart Industry. New York: New American Library, 1984. A series of brief biographical sketches of the pioneers of the computer industry, including Apple’s founders and their contemporaries. Linzmayer, Owen W. Apple Confidential: The Real Story of Apple Computer, Inc. San Francisco: No Starch Press, 1999. Moritz, Michael. The Little Kingdom: The Private Story of Apple Computer. New York: William Morrow, 1984. Covers the early history of the firm and provides behind-the-scenes insight into the founders and the unique corporate culture they fostered. Price, Rob, Jill Savini, and Thom Marchionna. So Far: The First Ten Years of a Vision. Cupertino, Calif.: Apple Computer, 1987. Although published as a public relations vehicle for the firm, this richly-illustrated volume provides an interesting and entertaining historical overview of the firm’s early years. Rose, Frank. West of Eden: The End of Innocence at Apple Computer. New York: Viking Press, 1989. A behind-the-scenes account of the managerial upheaval at Apple Computer that led Steve Jobs to leave the company as it sought to penetrate the business market. Sculley, John. Odyssey, Pepsi to Apple: A Journey of Adventure, Ideas, and the Future. New York: Harper & Row, 1987. A readable personal account of the firm from the standpoint of Apple’s chief executive officer and successor to Steve Jobs. Focuses on the struggle between Sculley and Jobs and its implications for the direction of the firm. Andrew M. Forman Elaine Sherman Cross-References IBM Changes Its Name and Product Line (1924); CAD/CAM Revolutionizes Engineering and Manufacturing (1980’s); Electronic Technology Creates the Possibility of Telecommuting (1980’s); IBM Introduces Its Personal Computer (1981); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999); Dow Jones Adds Microsoft and Intel (1999); The Y2K Crisis Finally Arrives (2000).

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MURDOCH EXTENDS HIS MEDIA EMPIRE TO THE UNITED STATES Murdoch Extends His Media Empire to the United States

Category of event: Foundings and dissolutions Time: December, 1976 Locale: New York, New York By purchasing the New York Post, Rupert Murdoch extended his successful tabloid style of newspaper publishing from London and Australia to the United States Principal personages: Rupert Murdoch (1931), a newspaper magnate Dorothy Schiff (1903-1989), the owner and publisher of the New York Post who sold it to Murdoch Otis Chandler (1927), the longtime head of newspaper operations for the Times Mirror Company George E. McDonald, (1920?) the president of the Allied Printing Trades Council William Kennedy, the president of the Pressmen’s Union Summary of Event In December, 1976, newspaper magnate Rupert Murdoch purchased the New York Post for $30 million from Dorothy Schiff. Murdoch’s premise in purchasing an American newspaper was founded on his previous success in publishing mass circulation newspapers. If his tabloid approach to journalism was successful in London and Australia, he believed, it should also be successful in the United States. Murdoch’s purchase created an international and transatlantic newspaper connection, one that rankled the established newspaper world of New York City and created contention in other 615

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parts of the United States. The U.S. publishing community generally opposed Murdoch’s incursion, partly because of his aggressive dealings in purchasing newspapers and expanding his paper kingdom and partly because of his tabloid format, which sensationalized the news and relied heavily on pictures. His formats were far removed from those of such major newspapers as The New York Times and The Christian Science Monitor, along with most other New York newspapers. British journalist Anthony Smith, writing in The Nation, describe Murdoch’s approach as an unceasing flow of titillation, sensationalism, and voyeuristic excitement, devoid of information. Edwin Diamond later suggested in the same publication that Murdoch seemed unconcerned with the conventional standards of taste imposed by advertisers aiming at an educated middle-class audience. A journalistic variant of Gresham’s Law appeared to be at work, in which newspaper publishers believed that bad journalism drives out good journalism. Murdoch believed that newspapers do not create taste, they merely reflect it. Murdoch’s American advertising agency comprised a team that often repeated, “You’ve got to hit ’em hard, mates, hard,” referring to the readers. Soon, Murdoch realized why his formula was not working in New York City as well as it did in London: The United States did not have the same sharply divided class structure. In 1977, Murdoch was asked in an interview whether his “cheeky working-class formula” was applicable to New York. Murdoch replied that New York City was middle-class and did not have a working class. Lines of battle between Murdoch and the rest of the New York newspaper establishment were drawn even more sharply when the pressmen struck in 1978. George E. McDonald was president of the Allied Printing Trades Council, the coordinating group to which nine of the ten newspaper unions belonged. He was also the president of the Mailers’ Union. William Kennedy was the president of the Pressmen’s Union. Murdoch was serving as the president of the Publishers Association of New York City. Following a breakdown in negotiations, McDonald suggested bringing in Theodore Kheel as a mediator. Most of the principals in the strike opposed bringing in Kheel. Kennedy, the president of the Pressmen’s Union, feared that Kheel would be the middleman in a cabal of publishers and unions other than his. The publishers were wary because the peace Kheel had brought in past strikes had come at a high price. Joseph Barletta of the Daily News had vetoed Kheel as a mediator in a Newspaper Guild strike at his paper the previous June. Distrust among the principals caused an early deterioration. Meanwhile, McDonald planned a strike by his mailers’ union against the 616

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already struck newspapers as a means of giving himself sufficient direct involvement to call for Kheel’s designation as mediator. Once Kheel was called in as mediator for the mailers’ union, McDonald thought it would be natural for him to mediate the pressmen’s strike. Instead, Kheel suggested that he enter negotiations as an adviser rather than as a mediator. Kenneth Moffett, deputy director of the Federal Mediation Conciliation Service in Washington, D.C., thought that Kheel could be a positive influence. A controversy occurred when Murdoch learned of a private meeting between Kheel and Walter E. Mattson, executive vice president and general manager of The New York Times. Murdoch was enraged because this meeting was contrary to the understanding he had when he became president of the Publisher’s Association. The original understanding was that none of the principals would discuss the terms of a settlement with anyone outside the group except by mutual agreement, and that Murdoch would be the central figure in all such moves. After a series of meetings and misunderstandings, Murdoch made a separate pact with the union and abandoned the bargaining table. He launched a Sunday edition of the New York Post, complete with a television supplement similar to one that the Daily News had been quietly planning. Murdoch thus expanded his subscriber base while other papers suffered from strikes. After the strike was settled, the Daily News went on a campaign to bury Murdoch by going after his subscribers and advertisers in an effort to win them away from Murdoch and thus bring down his expanding newspaper kingdom. Joseph Barletta stated in a 1979 interview that newspaper publishing in New York is not an “old boys’ club,” but that if Murdoch was going to be a street fighter, the establishment could play his game. By 1979, Murdoch still had only a small share of total U.S. newspaper revenues as well as a small portion of U.S. newspaper holdings. His sprawling international media empire annually grossed close to $600 million, netted more than $45 million after taxes, and sold two and a half billion copies of ninety-two publications, mainly in Australia and Great Britain. His American properties included the New York Post, the weekly Star, two papers in San Antonio, Texas, and The Village Voice. The Gannett Company during the same period published seventy-seven newspapers in thirty states, dwarfing Murdoch’s American holdings. The Times Mirror Company, publisher of the Los Angeles Times, made three times as much money as Murdoch’s entire empire. Otis Chandler, head of newspaper operations for that company, stated that he was waiting to see how long it would take for Murdoch to fail in the United States. Rather than fail, Murdoch continually analyzed his losses and adjusted the formats of his papers. Although tabloids such as The National Enquirer 617

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existed prior to Murdoch’s arrival on the scene, those papers had gradually changed to adjust to the market. Murdoch also adjusted. After his use of lurid headlines pertaining to the Son of Sam murders in the New York Post, the Murdoch formula declined in the United States. Murdoch knew he had to adapt. By 1979, the New York Post began to display upgraded quality, even though it still featured crime, scandals, gossip, and occasional bouts of hysteria. The paper now carried a solid financial section and reported more international and metropolitan news. American newspaper publishers also learned from Murdoch. He was becoming part of the American newspaper establishment. Impact of Event When Murdoch bought the New York Post from Schiff in 1976, the initial reaction from the newspaper establishment was fear that the Murdoch format of sensationalism would squeeze out the more conservative papers that appealed to the middle and upper classes. Publishers also objected to his agressive style of acquisitions. His style and format precipitated a “bury Murdoch” campaign. The Gannett Company, a complex of publications, organized an effort to identify and reclaim every subscriber who had switched to the Post. Murdoch drew criticism and animosity while generating fear among the established newspaper publishers. His aggressive manner in acquiring newspapers was abhorred, and his tabloid format caused fear among more established publishers that the quality of the newspaper world was going downhill. Some observers believed, however, that American newspapers were becoming more elitist. Murdoch offered choices by offering another style of journalism. His presence in the American market worked in two ways. Murdoch continued to adapt his style in order to make his newspapers sell, and the established media had to scramble to maintain their subscription lists. At the same time that Murdoch was becoming Americanized, he prompted action in response to his style. Other publishers had to react, going after potential subscribers in a shifting demographic environment and making other changes in their publishing operations. Many of the changes should have been made twenty years earlier. Murdoch’s entry into U.S. publishing made his new competitors move faster. Murdoch’s News International Company encompassed holdings in England, Australia, and the United States, resulting in an international press network different from any in the past. Murdoch kept a tight rein on every phase of his publishing empire, compared with the American style of departmental authority. Murdoch passed judgment on his publications in every department rather than assigning authority in the various phases of 618

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publishing. He even brought in American editors to replace some of his overseas editors. Murdoch’s ownership of the New York Post from 1976 to 1988 was marked by flamboyance. Abe Hirschfeld acquired the Post in 1988. By 1993, The Wall Street Journal and The New York Times were carrying news of its bankruptcy and a subsequent bid by Murdoch to take over the newspaper once again. A 1990 article in The Economist featured Murdoch’s News Corporation, describing how nobody had exploited the booming media industry of the late 1980’s better than Murdoch. In addition, few had borrowed more money to do it. Murdoch’s willingness and ability to borrow money gave him opportunities unavailable to most others. Newspaper articles on his bids and holdings show years of being deeply in debt, but he always managed eventually to show a profit. Murdoch continued, into the 1990’s, to make bids to purchase media holdings including newspapers, magazines, and radio and television stations throughout the world. Bibliography Diamond, Edward. “Low Road to Oblivion: Murdoch and the Post.” The Nation 230 (May 24, 1980): 615-617. Explains what was often cited as Murdoch’s “S” formula: scare headlines, sex, scandal, and sensation, with a fifth “S” for New York—Studio 54 people. Explains the ups and downs in readership of the Post. Also explains how the newspaper shutdown of 1978 helped create a Post monopoly until the strike was over. Gottlieb, Martin. “Cuomo Backs Murdoch’s Bid for Post.” The New York Times, March 25, 1993. Kennedy, Carol. “Tough Guy in the Gentlemen’s Club.” Maclean’s 94 (March 2, 1981): 10. Theorizes about why Rupert Murdoch became so aggressive, suggesting that he tried to live up to his father’s reputation as a respected newspaperman. Also contains viewpoints of Murdoch’s executives. Raskin, A. H. “A Reporter at Large, II: Intrigue at the Summit.” The New Yorker 54 (January 29, 1979): 56-85. Penetrating report about the personalities involved in the pressmen’s strike of 1978. Reilly, Patrick M. “Murdoch to Offer Interim Proposal to Acquire Post.” The Wall Street Journal (March 26, 1993): B7. Describes Murdoch’s submission of a plan to a federal bankruptcy judge for the purchase of the New York Post. Shawcross, William. Murdoch: The Making of a Media Empire. Rev. & updated. New York: Simon & Schuster, 1997. 619

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Tuccille, Jerome. Rupert Murdoch. New York: D. I. Fine, 1990. Describes Murdoch as standing at the center of a communications revolution that is reshaping ways of receiving information. Describes his media empire and the deals that created it. Welles, Chris. “The Americanization of Rupert Murdoch.” Esquire 91 (May 22, 1979): 51-59. Explains how Murdoch created intense animosity in a short time. He brought his own “game rules” with him, but his rules and those of the newspaper establishment changed and to some extent meshed. Corinne Elliott Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); Congress Establishes the Federal Communications Commission (1934); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); The Cable News Network Debuts (1980); Cable Television Rises to Challenge Network Television (mid-1990’s).

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AT&T AND GTE INSTALL FIBER-OPTIC TELEPHONE SYSTEMS AT&T and GTE Install Fiber-Optic Telephone Systems

Category of event: New products Time: April, 1977 Locale: Chicago, Illinois, and Long Beach, California With the installation of the AT&T and GTE fiber-optic telephone systems, the potential for high-quality, expanded telephone service was in place, as was the impetus to find other uses for the new technology Principal personages: Joseph H. Mullins, the man responsible for the transmission equipment of the AT&T installation Morton I. Schwartz (1934), the man responsible for the optical cable splicing techniques used in the AT&T installation Bert E. Basch (1942), the project leader responsible for GTE system design and installation Robert B. Lauer (1942), the project leader of the GTE optoelectronics group Will A. Reenstra (1923), the man responsible for installation of the AT&T equipment Howard Carnes (1943), a designer of the GTE system Richard A. Beaudette, a designer of the GTE system William Powazinik, the man responsible for the fabrication of the GTE light-emitting diodes Joseph Zucker (1928), the man responsible for the GTE optoelectronics devices Stewart D. Personick (1947), the man in charge of measuring the quality of transmission and splice losses in the AT&T installation 621

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Summary of Event In April of 1977, General Telephone and Electronics (GTE) installed fiber-optic telephone service over a 5.6-mile path between a Long Beach, California, switching office and a local exchange in Artesia, California. Shortly thereafter, American Telephone and Telegraph (AT&T) switched on its own fiber-optic communications system under the streets of Chicago. The first fiber-optic public telephone systems were in place and operating, and their success or failure in providing reliable and economical expanded services would determine the fate of the infant technology of fiber optics and the divergent uses that might develop for it. Developments in optical communication were minimal until the introduction of the laser. Charles Townes and Arthur Schawlow of Bell Laboratories proposed the concept of the laser as an intense light source in 1958, and by 1960 Theodore Maiman of Hughes Research Laboratory had succeeded in creating a functional laser. The most significant event leading to the establishment of optical fiber as a viable transmission medium was the publication of a paper in 1966 by K. C. Kao and G. A. Hockham of Standard Telecommunication Laboratory in England, in which they proposed that optical fiber could be used as a transmission medium provided that the loss in the fiber could be reduced to 20 decibels per kilometer. At the time, signal losses in optical fiber were typically about 1,000 decibels per kilometer, making the fiber almost useless as a transmission medium. In 1970, scientists at Corning Glass Works achieved the manufacture of optical fibers with losses measuring less than 20 decibels per kilometer. With the advent of the laser as an intense light source and the development of high-quality optical fibers, the stage was set for researching the possibility of establishing a fiber-optic communications network. Fiber optics refers to a technique for transmitting information that has been modulated with a light source from a laser or light-emitting diode (LED) along optical fibers. Light has a higher frequency on the electromagnetic spectrum than other forms of electromagnetic radiation commonly used to transmit information, such as radio waves and microwaves. Because of the higher frequency of light, a fiber-optic channel can carry much more information than can other means of data transmission. Optoelectronics is a discipline of electronics having to do with electronic devices that generate, detect, transmit, and modulate electromagnetic radiation in the infrared, visible, and ultraviolet parts of the electromagnetic spectrum. One of the basic functions of optoelectronics is to transform electrical pulses to light, then back again. For the telephone companies, the pursuit of fiber-optic communication, over the short term, had a logistical basis. The appeal of fiber optics, in the 622

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light of increasing demand for telephone service, was that fiber-optic cable could go anywhere copper-wire pairs could go, so service could be expanded over established paths and over the same real estate. Some of the foreseeable economic and technical advantages of fiber-optic systems included longer distances between repeaters or terminals resulting from decreased signal loss, higher rates of data transmission because of greater available bandwidth, and freedom from the electromagnetic interference typical of a copper-wire environment. GTE’s Long Beach, California, fiber-optics system was designed and developed by GTE Laboratories Inc. of Waltham, Massachusetts. The pulse code modulation (PCM) equipment that provided the 1.544 megabits per second digital signals to the optical communications link was manufactured by GTE Lenkurt Incorporated of San Carlos, California. General Cable Corporation of Greenwich, Connecticut, developed the optical-fiber cable using fibers manufactured by Corning Glass Works. The GTE system carried twenty-four simultaneous telephone conversations on two of six optical fibers. Although the total distance between switching offices was 5.6 miles, the fiber-optic cable was looped back on itself so that the total distance for the system spanned 21.6 miles, connected through eight repeaters. According to Lee L. Davenport, then president of GTE Laboratories, the success of the Long Beach, California, installation proved that fiber-optic circuits are significantly quieter than copper-wire circuits and that it is feasible to use optical transmission systems on a permanent basis. The installation of the Chicago fiber-optic system was a cooperative effort among American Telephone & Telegraph Company, Bell Laboratories, Western Electric Company, and Illinois Bell Telephone Company. The optical-fiber cable in the Chicago experiment contained two ribbons of twelve optical fibers each. The optical fibers were made by the Modified Chemical Vapor Deposition Process (MCVD), which was invented at AT&T Laboratories. Video encoders and other terminal equipment had been installed to enable the system to provide customer voice and data transmission, Picturephone Meeting Service (PMS), and interoffice trunk service. Most of the system’s traffic was digitized and transmitted at the 44.7 megabits per second rate necessary to convey Picturephone video signals. The half-inch-diameter Chicago cable contained two twelve-fiber ribbons. According to Joe Mullins, then head of the Bell Laboratories Fiberguide Trunk Development Department, a single pair of fibers could carry 576 conversations. One of the fiber-optic ribbons was used for commercial traffic, such as the transmission of voice, data, and video information. The 623

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rest of the fiber-optic lines were used for tests and measurements. The total distance of the Chicago optical link was about 1.6 miles. The successful installation and operation of the Chicago system gave AT&T the necessary field experience that it would soon need for other fiber-optic installations. The success in Chicago convinced management that such systems were economically effective and led to lightwave trunk development that began in 1978 and resulted in the first standard commercial service in September, 1980. The Chicago project was also a precursor to a later AT&T commitment to lay the first transatlantic and transpacific fiber-optic cable systems, completed in 1988 and 1989, respectively. The installation of the early fiber-optic telephone systems was the first step taken by two telecommunications giants toward the deployment of a new technology that had heretofore only been tested in the laboratory. This step signaled the beginning of a new era that would see changes in the way the world perceived the technology of telecommunications. Voice, data, and video transmissions were now riding a beam of light to their destination, instead of a copper wire. The success of the fiber-optic telephone systems was a major technological and historical event that opened the floodgate from which would be unleashed a torrent of entrepreneurial efforts taking advantage of the new technology. Impact of Event From its beginning with the experimental telecommunications systems in Chicago and Long Beach that demonstrated that it was technologically and economically feasible to combine electronic, laser, and fiber-optic technologies to create high-quality telecommunication systems, the science of fiber optics has grown and flourished. New telephone systems almost exclusively use optical fiber instead of copper cable, and old systems were upgraded. As of the early 1990’s, only the final link between the American home and the telephone branch exchange remained predominately copper-wire pairs. That also began to change, not because the telephone companies wanted to provide subscribers with better-quality voice service, for twisted-wire pairs offer excellent voice transmission to the home, but because other services such as high-definition TV (HDTV) and data require high-bandwidth optical technology or coaxial cable to carry the broadband signals. Therein lies a conflict between the telephone companies and the cable television industry. Most U.S. households have telephones and television sets. About onefourth have personal computers, and about half subscribe to cable television. Telephone companies have access to these homes by means of the twisted-wire pairs that connect to the family telephone. Cable television companies gain entry by coaxial cable. 624

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The Cable Act of 1984 prevents telephone companies from owning or operating cable television businesses within their designated service areas. Free of any real competition, the cable television industry experienced tremendous growth, and its companies, for the most part, operated as unregulated monopolies. Seeing that the cable television industry was no longer a small, struggling business in need of protection from competition, the Federal Communications Commission (FCC) began investigating the possibility of recommending the repeal of the Cable Act of 1984, thereby allowing telephone companies to transmit television signals and enter into competition with the cable television industry. If the repeal of the Cable Act takes place, a race to provide optical fiber to the home will begin. Huge profits can result from using high-bandwidth optical technology to provide telephone service as well as high-definition television, data, and other services. Because coaxial cable is not an efficient conductor of electronic pulses over long distances, signals traveling over it need to be amplified about every quarter mile. Coaxial cable is efficient over stretches of less that three hundred feet when carrying conventional video, but an HDTV signal would start to distort after only about one hundred feet. Signals traveling over fiber-optic cable need reamplification only about every thirty miles. Telephone companies have the advantage of already having a fiber-optic backbone installed for their communications networks but would have to bear the expense of supplying fiber optics to the home if they are to reap the profits resulting from customer demand for expanded services. Manufacturers of optical fiber and optoelectronics devices see tremendous potential profits in supplying the material necessary to provide fiber optics for the local telephone loop. The monumental quantities of information already traveling over fiberoptic telecommunications networks on beams of flashing light are blurring the distinction between telephone voice information, entertainment systems, and computer data. It is all simply digital data, ones and zeros. Those who would control this surging sea of information are playing for high stakes. Losses could be staggering, but the rewards could be in the hundreds of billions of dollars. To this end, alliances began forming in the early 1990’s among telephone, cable television, electronics, computer, entertainment, video game, and publishing companies that were destined to change the face of television from a simple cyclopic box allowing the viewing only of programs that happen to be on the air to an interactive control center from which can be ordered selections from a huge library of movies, arcade-type video games, retail-store merchandise from video catalogs, and any program from five hundred television channels. Music, text, and instructional 625

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programs will also be available on demand. Many more innovative services were in various stages of development. Their implementation depended in large part on public demand and legislation. Bibliography Carey, John, and Neil Gross. “The Light Fantastic: Optoelectronics May Revolutionize Computers—and a Lot More.” Business Week, May 10, 1993, 44-49. Looks at the fiber-optics revolution that essentially began with the deployment of fiber-optic telephone systems in 1977. Modern uses for fiber optics from medicine to aircraft wings are discussed. Free, John. “Fiber Optics Head for Home.” Popular Science 238 (March, 1991): 64-95. Discusses the many services that will be available in the home via fiber-optic lines. Kuecken, John A. Fiberoptics. Blue Ridge Summit, Pa.: Tab, 1980. A well-written book that covers the history, basics, applications, and theory of fiber optics. Leon, Jose C. de, ed. Selected Articles from the GTE Lenkurt Demodulator. San Carlos, Calif.: GTE Lenkurt, 1976. Several chapters cover events leading to the development of the concept of fiber optics. Light sources such as light-emitting diodes and lasers are discussed, as is the future role of optical communication in the telephone industry. Noll, A. M. “The Broadbandwagon!: A Personal View of Optical Fibre to the Home.” In Telephone Company and Cable Television Competition, edited by Stuart N. Brotman. Boston: Artech House, 1990. Noll discusses the impending conflict between telephone companies and the cable television industry over service to the home. Technical and economic issues concerning fiber-optic cable installation are viewed, and historical parallels of services are drawn. Schwartz, M. I., W. A. Reenstra, J. H. Mullins, and J. S. Cook. “The Chicago Lightwave Communications Project.” The Bell System Technical Journal (July/August, 1978): 1881-1888. A clear, readable description of the Bell System Chicago fiber-optic telephone system installation in 1977. Schwartz, Morton I. “Optical Fiber Transmission—From Conception to Prominence in Twenty Years: Emerging from Infancy into the Limelight.” IEEE Communications Magazine 22 (May, 1984): 38-48. Includes a brief historical description of the evolution of optical fiber communications, a technical discussion of fiber-optic cable, and an overview of AT&T Bell Laboratories’ fiber-optic field trials. Although some parts of this paper are slightly technical, the language is clear and very readable. 626

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Waller, Larry. “Fiber’s New Battleground: Closing the Local Loop.” Electronics 61 (February, 1989): 94-96. An excellent article describing the conflicts between cable television and the telephone companies. Suggests solutions to some of the problems and discusses the costs and profits of providing fiber optics to the home. Weinstein, Stephen B., and Paul W. Shumate. “Beyond the Telephone.” The Futurist 23 (November/December, 1989): 8-12. Looks at innovative communications concepts that may drastically change the way people live. Jose C. de Leon Cross-References Congress Establishes the Federal Communications Commission (1934); Electronic Technology Creates the Possibility of Telecommuting (1980’s); Cable Television Rises to Challenge Network Television (mid-1990’s).

627

THE ALASKAN OIL PIPELINE OPENS The Alaskan Oil Pipeli ne Opens

Category of event: Transportation Time: July 28, 1977 Locale: Prudhoe Bay to Valdez, Alaska The trans-Alaskan pipeline between Prudhoe Bay and the port of Valdez, long delayed by environmental considerations, opened nearly ten years after discovery of a major oil field at Prudhoe Bay Principal personages: Robert O. Anderson (1917), the head of Atlantic Richfield Company, the principal actor in both the discovery of oil in Alaska and the construction of the pipeline Theodore “Ted” Stevens (1923), the primary spokesman for Alaska in the Senate Morris Udall (1922-1998), a congressman who was the most vocal critic of the pipeline in the House of Representatives Summary of Event The opening of the trans-Alaskan pipeline on July 28, 1977, represented a victory of energy considerations over environmental concerns and of technology over a bewildering array of problems. Tremendous problems had to be overcome in order to produce oil in the frozen wilderness of Alaska’s North Slope and then transport it across nearly a thousand miles to an open port without disturbing, to any significant extent, the area’s fragile physical and biological landscape. The story of Alaska’s oil begins with the creation of the Naval Petroleum Reserve on the territory’s North Slope in 1923. The history unfolds essentially in three stages from that moment to the opening of the pipeline more than a half century later. During the first of these stages, which lasted until 628

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the 1960’s, exploratory drilling in Alaska occurred intermittently, usually at times of projected oil shortages in the continental United States and usually more as a hedge against future shortages than as the first step in a massive commercial development of Alaska’s oil wealth. Even if the technological difficulties in producing and transporting Alaskan oil could be solved, the costs involved would have made the product prohibitively expensive. The discovery of cheap oil in Kuwait and exploration of other rich oil fields in the Middle East during the late 1940’s and early 1950’s further dampened interest in Alaska. Exploratory drilling there slowed. Changes in the world oil market during the late 1950’s and early 1960’s inaugurated the second period, one of growing interest in Alaskan oil that lasted until the “eleventh hour” discovery of oil in Prudhoe Bay in 1967. As the oil companies of the Western world began to lose the control they had exercised over the world petroleum market for half a century, particularly after the birth of the Organization of Petroleum Exporting Countries (OPEC) in 1960, interest was rekindled in finding closer-to-home sources of oil. Meanwhile, steady increases in the posted price of oil during the 1960’s closed the gap between the cost of producing Alaska’s oil and the price that it could fetch on the world market. During the mid-1960’s, world oil prices increased. At the same time, world politics and the economic power of OPEC made the supply of cheap oil from abroad less secure. These conditions combined to lure an expanding number of American firms into exploratory ventures abroad and at home, chiefly along the Outer Continental Shelf. Among these adventurers was the Atlantic Richfield Company, later known as ARCO. Under the direction of Robert O. Anderson, one of America’s last great oil wildcatters, Atlantic Richfield obtained the majority of the governmental leases then being granted for exploratory and developmental activity in Alaska. The company then began its search. Even after its initial well on Alaska’s North Slope proved to be dry in 1966, Anderson pressed on with exploratory efforts. On December 26, 1967, in temperatures thirty degrees below zero, Atlantic Richfield struck a pool of oil that would eventually be estimated to contain ten billion barrels. This was the largest oil field ever discovered in North America. Then came the third period, the most frenzied of all, in which Atlantic Richfield struggled for permission to build the pipeline necessary to ship oil from the often-frozen tundra of the North Slope to southern markets. While Atlantic Richfield was confirming the size of its find and evaluating its potential, environmental groups began to mobilize in opposition to the construction of any pipeline running south across Alaska’s frozen landscape. Their hand was strengthened enormously by the Santa Barbara oil 629

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spill in 1969 and the National Environmental Protection Act (NEPA) passed in its wake, at approximately the same time that oil companies were requesting a federal right-of-way to build a trans-Alaskan pipeline. The NEPA required the United States Department of the Interior to prepare a justifying environmental impact statement before granting permission to begin any project likely to have substantial effects on the environment. On March 20, 1970, the Department of the Interior sought to comply with the letter of the law by issuing an eight-page impact assessment that substantially downplayed the risk of environmental damage being caused by a Prudhoe Bay-to-Valdez pipeline. Within a week, a group of respected environmental organizations jointly sued the Department of the Interior for violating the National Environmental Protection Act. Three weeks later, a court injunction halted construction on the pipeline until such time as a definitive court ruling on compliance with the NEPA could be obtained. The trucks and the half million tons of pipeline previously rushed to Alaska so that work could begin on the pipeline ultimately remained in storage for nearly four years. Two of those years were spent in judicial wrangling. On March 20, 1972, the Department of the Interior produced a nine-volume environmental impact statement to justify its approval of the pipeline’s construction, but the injunction remained in effect until August 15 of that year, when the case was appealed to the Supreme Court. Then came the October, 1973, Arab-Israeli war and resultant Arab oil embargo on Western countries that assisted Israel in that war. OPEC emerged as a cartel that was effective in controlling the price and production of oil. Almost overnight, the price of oil from OPEC countries quadrupled to nearly $12 per barrel. Opposition in Congress to the construction of the trans-Alaskan pipeline collapsed. A measure to approve the Interior Department’s last environmental impact statement, relieve the Department of the Interior from further obligations under the NEPA, and approve the construction of the trans-Alaskan pipeline from Prudhoe Bay to Valdez was passed on November 16, 1973, less than a month following the announcement of the Arab oil embargo on shipment of petroleum to the United States. By April, 1974, the monumental task of constructing an environmentally friendly pipeline was at last under way. Impact of Event Almost every aspect of the production and transportation of oil in Alaska represented a technological and environmental challenge to the petroleum industry. Environmentalist groups that sought to block the development of Alaska’s oil reserves were not entirely wrong when they claimed that the industry, when oil was first discovered at Prudhoe Bay, had lacked the 630

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technology to exploit the field without significant damage to the environment. The environment of icebound Prudhoe Bay was unique in the oil industry’s experience. Temperatures could drop to and remain at sixty-five degrees below zero for long periods in winter. The tundra would freeze solid. The layer of permafrost below the tundra could be as thick as a thousand feet. Steel pilings then in use for rig construction were useless. Laying an eight-hundred-mile pipeline across the terrain posed equally taxing problems. Once thawed, the tundra took on a spongelike property and was thus unable to provide the stability needed for a pipeline. Except in winter, the ground could be extremely delicate, so delicate that even light trucks could easily disfigure it. On the other hand, laying the pipeline below the tundra posed serious threats to the permafrost itself. Unless precautions were taken, oil being pumped from wells would enter the pipeline at temperatures above 150 degrees. Oil rushing through the pipeline at that temperature could melt the permafrost. Meanwhile, all along the stretch from Prudhoe Bay to Valdez, construction of the pipeline and the pipeline itself posed threats to the landscape as well as to the migratory paths of caribou and other animals. Environmentalists feared the damage that would be caused by construction crews as they worked and also questioned how animals would respond to the pipeline once it was in place. Subsequent shipment of Alaskan oil to California by means of tankers traveling from Valdez through Prince William Sound carried yet another set of environmental risks, as the 1989 wreck of the Exxon Valdez would underscore. So formidable were the technological and environmental challenges confronting ARCO that its executives considered another pipeline route—one running across Alaska and then Canada to consumers in the American Midwest—as well as other options including shipment of oil from Prudhoe Bay by icebreaker-tankers. The Valdez route was the shorter and generally less expensive option. In addition, because it did not cross national borders, it was also the option most in keeping with security-ofoil-supply concerns. Furthermore, it did not require negotiating tricky right-of-passage agreements with a foreign country that the trans-Canada route would have required. Nor was the Canadian route without environmental risks of its own. At a cost of $7.7 billion, the pipeline was completed in 1977. Within a year, it was carrying a million barrels of oil per day from the North Slope to the port facilities in Valdez. Within another year, as a result of another international oil crisis and another doubling of the price of OPEC oil to more than $36 per barrel, investors in the pipeline were earning handsome 631

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profits. The principal remaining problems associated with the trans-Alaskan pipeline revolved around the problems of abundance. By the early 1980’s, the amount of oil being transported had doubled, stemming America’s appetite for imported oil but also overwhelming California’s ability to absorb the oil available for shipment from Alaska. Finding other outlets for Alaskan oil thus became an unforeseen inconvenience of the pipeline’s success, but it was only an inconvenience. The brake placed on the growing flow of imported oil into the United States more than offset such unforeseen consequences of the shipment of Alaskan oil. Moreover, although the flow of oil from Alaska came too late to prevent a second oil crisis from occurring in 1979, it played an important part in contributing to the general decline in Western demand for OPEC oil. That decline in demand exerted such pressure on the cohesiveness of the OPEC organization that OPEC substantially lost control over the production rates of its member states and was powerless to prevent the virtual collapse in the posted price for a barrel of OPEC oil in the mid-1980’s. Bibliography Anderson, Robert O. Fundamentals of the Petroleum Industry. Norman: University of Oklahoma Press, 1984. Slick, illustrated, readable, and informative, this work offers just what the title suggests: a guide to and history of U.S. and foreign oil industries, their on- and offshore operations, and the relationship between the worlds of oil and government. For beginners and general audiences. Berry, Mary Clay. The Alaska Pipeline: The Politics of Oil and Native Land Claims. Bloomington: Indiana University Press, 1975. An insightful account of the impact of the Alaska pipeline on the development of the “two Alaskas,” one of natives and one of oil. Bradley, Robert L. Oil, Gas, and Government: The U.S. Experience. Lanham, Md.: Rowman & Littlefield, 1996. Chasan, Daniel Jack. Klondike ’70: The Alaska Oil Boom. New York: Praeger, 1971. Another good account of the impact of oil on Alaska, this time in the form of a very readable narrative covering the first days of the oil rush that followed Atlantic Richfield’s discovery of oil. Coates, Peter A. The Trans-Alaska Pipeline Controversy: Technology, Conservation, and the Frontier. Bethlehem, Pa.: Lehigh University Press, 1991. A good study of the confrontation between environmentalists and energy developers seeking to build the trans-Alaskan pipeline, examined in the context of a century of confrontations between environmentalists and developers over Alaskan resources. Davidson, Art. In the Wake of the Exxon Valdez. San Francisco, Calif.: 632

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Sierra Club Books, 1990. An in-depth, often technical analysis of the spill of approximately ten million gallons of petroleum in Prince William Sound in 1989. Dixon, Mim. What Happened to Fairbanks?: The Effects of the TransAlaska Oil Pipeline on the Community of Fairbanks, Alaska. Boulder, Colo.: Westview Press, 1978. Two years of field work produced a volume of considerable insight and a few surprises pertaining to the unintended effects of the pipeline’s construction on life in Fairbanks. Jorgensen, Joseph G. Oil Age Eskimos. Berkeley: University of California Press, 1990. A solid interpretation of the effect of energy development on one of the poorest groups of native Americans. Compensation for the oil on their Alaskan homelands later relieved poverty. Tussing, Arlon R., and Linda Leask. The Changing Oil Industry: Will It Affect Oil Prices? Anchorage, Alaska: Institute of Social and Economic Research, University of Alaska, 1999. Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. A massive study of the development of the international oil industry, with as much attention to the personalities and politics involved as to the historical events that marked the evolution of the petroleum industry in the modern world. Joseph R. Rudolph, Jr. Cross-References Discovery of Oil at Spindletop Transforms the Oil Industry (1901); The Supreme Court Decides to Break Up Standard Oil (1911); The Teapot Dome Scandal Prompts Reforms in the Oil Industry (1924); Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska (1967); Arab Oil Producers Curtail Oil Shipments to Industrial States (1973); The United States Plans to Cut Dependence on Foreign Oil (1974).

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CARTER SIGNS THE AIRLINE DEREGULATION ACT Carter Signs the Airline Deregulation Act

Category of event: Transportation Time: October 24, 1978 Locale: Washington, D.C. Although deregulation gave managers more flexibility to develop their business strategies, the subsequent shakeout in the airline industry underscored the need to avoid poorly planned rapid expansion Principal personages: Jimmy Carter (1924), the president of the United States who signed the Airline Deregulation Act David C. Garrett (1922), the president and chief executive officer of Delta Air Lines at the time of deregulation Alfred Kahn (1917), the chairman of the Civil Aeronautics Board in the late 1970’s, a chief advocate of deregulation Harding L. Lawrence (1920), the chief executive officer and chairman of the board of Braniff Airways at the time of deregulation Summary of Event The Airline Deregulation Act of 1978 gave the airline trunk carriers more freedom to develop their business strategies by relaxing the constraints imposed by the Civil Aeronautics Board (CAB) under previous legislation. The term “trunk carriers” refers to major airlines that primarily serve large cities and high-density routes. In contrast, local-service carriers link small cities with large traffic centers. In 1978, the United States trunk airline industry consisted of eleven major carriers: American Airlines, Braniff Airways, Continental Air Lines, Delta Air Lines, Eastern Airlines, National 634

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Airlines, Northwest Airlines, Pan American World Airways, Trans World Airlines, United Air Lines, and Western Air Lines. Prior to the Airline Deregulation Act, signed by Jimmy Carter on October 24, 1978, the CAB strictly regulated airline routes, fares, and mergers. For example, before a trunk carrier could provide service on a new route, it had to petition the CAB for approval. Approval was contingent upon the CAB’s judgment regarding three issues: need for additional service on the route, which airline should be awarded the route, and whether the route tied into an airline’s existing network. Incumbent airlines usually contended that the petitioned route could not support any additional service, so proceedings often dragged on for years. The CAB regulated air fares by establishing maximums, minimums, or both maximums and minimums. Each carrier was required to obtain permission before introducing a new fare. The CAB ruled on these fare changes to determine whether they were reasonable. Although the CAB designed the fare limits to provide a rate of return on investment equal to 12 percent, this target was rarely reached. Mergers were a third area in which the CAB exercised control. The airlines used mergers to acquire the route networks and aircraft capacity of other carriers. This strategy was often more expedient than petitioning the CAB for individual routes because the acquiring carrier could receive many new routes simultaneously. The CAB generally approved a merger, however, only if it prevented a carrier from going bankrupt, with the result that a particular geographic area would lose air service. The CAB regulations effectively prevented trunk carriers from competing on the basis of fares and routes. Although the airlines could offer different in-flight amenities, each aircraft had approximately the same level of comfort. Because their product was undifferentiated, airline managers realized that customers were more concerned with scheduling the most convenient flight than with maintaining brand loyalty. As a result, frequency of service became the most important determinant of market share. The CAB did not regulate flight frequency except to prevent de facto abandonment of routes. Proponents of deregulation argued that the CAB regulations were responsible for increasing the cost of air transportation. Their argument was based on the premise that as the airlines scheduled more flights to increase market exposure, each flight carried fewer passengers. Costs, and thus fares, rose because the fixed cost of each flight was spread among fewer passengers. They argued that deregulation would permit the airlines to differentiate their product and provide a wider range of fares and services. One anticipated outcome was lower prices. 635

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Advocates of deregulation also argued that the legislation would result in greater efficiency and flexibility. First, by increasing a carrier’s flexibility to improve route structures and flight schedules, deregulation would permit better aircraft utilization. Second, assets would not be wasted simply to seek future route awards. Under regulations, some carriers had used artificially low fares to strengthen their bargaining position when seeking future routes. Third, carriers would have more leverage when dealing with labor Jimmy Carter’s administration began the work of deregulating transportation industries that was unions because the U.S. govcontinued by Ronald Reagan. (White House His- ernment would not be oblitorical Society) gated to aid an ailing airline. With the exception of United Air Lines, the trunk carriers either vehemently or tacitly opposed deregulation. They argued that the absence of entry restrictions on the more profitable routes would result in duplication and overcapacity. Because more planes would fly these routes, higher rather than lower fares would result. If increased competition resulted in excess capacity, then profitability would decline because each flight would carry more empty seats. In addition, they argued that deregulation would diminish stable and reliable air service. In a deregulated environment, an airline could enter a market on weekends or holidays and carry full flights by offering reduced fares. During periods of reduced traffic demand, however, the carrier could suspend its service. Finally, critics feared that rate wars would develop as airlines offered cut-rate fares to establish themselves in new markets. As incumbent airlines lowered their fares to remain competitive, profits would be reduced. As a result, carriers would have difficulty replacing their fleets. Opponents of deregulation also argued that smaller cities would suffer reduced or suspended service because the trunk carriers would concentrate their equipment capacity on the lucrative long-haul routes between highdensity population centers. This argument was similar to a cross-subsidy issue: The trunk airlines claimed that they used profits from their long-haul 636

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routes to negate losses on their shorter, less profitable routes. If deregulation eliminated these profits, then carriers would not be able to offset the losses from their shorter routes and might have to abandon them. Flights over shorter distances are relatively more expensive in terms of cost per mile because fixed costs, such as passenger and luggage processing, are spread over fewer miles. In addition, slower average aircraft speeds cause higher labor costs per seat mile. Finally, fuel costs per seat mile are proportionately higher because the rate of fuel consumption is greater during takeoff and landing than it is during flight. Because other forms of transportation, such as the automobile, are relatively attractive at shorter distances, demand is highly elastic; that is, customers are very likely to choose a substitute form of transportation if prices go up. As a result, the higher costs of shorter flights cannot be offset by fares that reflect those costs and allow as much profit as earned on longer flights. These arguments were never substantiated. Several studies were conducted to determine the extent of cross-subsidization, with results indicating that the trunk carriers did not rely heavily on this practice. The Airline Deregulation Act protected small communities by stating that an airline providing the only service on a route had to continue that service until a replacement carrier was found, thus defusing one criticism of deregulation. Impact of Event The aftermath of airline deregulation underscored the need for managers to accurately evaluate corporate strategy. For many years, the airlines preferred to pay the costs of CAB regulation rather than face the uncertain environment that would exist without controls. Once the industry was deregulated, however, many carriers were lured by the freedom to expand and increase market share. The result was that many airlines overexpanded, faced overcapacity, sold their product at low prices, and suffered declining profits. Although airlines earned record profits in 1978, the trunk airline industry exhibited declining performance and reported a net loss in 1980. The loss was incurred because managers did not accurately assess the effects of their strategies on competitors’ behavior and profitability. Instead, they engaged in debilitating price wars and provided excess capacity on the more popular routes. Low fares in conjunction with rising fuel and operating costs caused declining profits in the first years of deregulation. Prior to deregulation, managers were enamored of the concept of flight frequency. Because CAB regulations severely limited the trunk carriers’ ability to compete on the basis of fares and routes, flight frequency became the most important determinant of market share. This led to the widespread 637

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practice of using long-term debt to finance large aircraft fleets that could provide frequent service. As a result, trunk carriers were highly leveraged, faced large interest charges, and were adversely affected by the 1980-1981 recession that reduced air traffic demand. A brief description of the corporate strategies implemented by Delta Air Lines and Braniff Airways following deregulation illustrates these points. Delta and Braniff implemented strategies that resulted in good and poor performance, respectively. Both companies used a hub-and-spoke route network prior to deregulation, and both carriers flew the less popular routes to small and medium-sized cities. These flights were then aggregated at a hub city and efficiently scheduled to connect with the carrier’s more profitable long-distance flights. This system minimized passenger inconvenience resulting from layovers and made the airlines less dependent on other carriers for their feeder traffic. A major advantage of this type of network was that each airline was generally a monopoly carrier on its short-haul routes. Consequently, older planes could be used without worrying about flight frequency, competition, or price wars. As a result, these carriers entered the deregulated era in better financial shape than did the larger carriers. Delta had one of the industry’s lowest debt ratios, whereas Braniff’s leverage was commensurate with the industry average. These two carriers also tended to be more profitable than the larger carriers. Following deregulation, Braniff changed its strategy and placed more emphasis on adding long-haul routes. In 1979, for example, Braniff added new routes to Europe and the Far East, even though it lacked marketing exposure in these areas. Braniff hoped that the new domestic and international routes would feed each other and increase traffic flow through its domestic hub cities. It also expected that new traffic patterns would help smooth demand over the entire system. This rapid expansion strategy was not compatible with the environment. Braniff tried to expand its operations during a period of rising interest, fuel, and operating costs, but it had to lower prices to remain competitive on existing routes and offer promotional fares to increase its market exposure on the new routes. Braniff ignored the importance of flight frequency and its relationship to market share. In many cases, Braniff initiated only one flight on its new routes, sometimes with an inconvenient arrival or departure time. As a result, Braniff was not able to schedule its system as efficiently as it initially hoped. Braniff also shifted capacity from markets in which it previously held a prominent position, with the result that competitors entered these cities and stole market share. In contrast to Braniff, Delta maintained its position as one of the trunk industry’s most profitable carriers. It did not deplete its resources in price 638

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wars on the more popular routes, adding routes only when it perceived a need for additional service. Delta also added routes that could be profitable in the short term. As a result, it initiated service to fast-growing regions in the Pacific Northwest, California, and Texas. Delta did not sacrifice flight frequency in its traditional markets to provide service on these new routes. When Eastern Airlines increased flight frequency to Atlanta, Delta’s major hub, Delta countered by simultaneously adding more flights. To combat the tendency toward providing excess capacity, Delta introduced flight complexes at its Atlanta hub. Thirty or forty planes would converge on Atlanta at two-hour intervals, exchange passengers, and fly to different spoke cities. The strategy kept a greater percentage of passengers within the feeder and connector system. Passenger layover was minimized through efficient scheduling which, in turn, reduced the chance that passengers would defect to another airline. Delta became one of the dominant U.S. carriers, and Braniff filed for bankruptcy in 1982. The Carter Administration made initial progress toward deregulating the truck, railroad, airline, and banking industries. Ronald Reagan also supported deregulation during his two terms in office. As illustrated in the airline industry, success in a deregulated environment would require careful attention to corporate strategy and avoidance of short-term tactics with long-term pitfalls. Bibliography Dempsey, Paul Stephen, and Andrew R. Goetz. Airline Deregulation and Laissez-Faire Mythology. Westport, Conn.: Quorum Books, 1992. Good retrospective critique of the outcome of deregulation. The authors contend that several key assumptions made by free-market economists were erroneous. The authors advocate some regulatory reform. Fruhan, William E., Jr. The Fight for Competitive Advantage: A Study of the United States Trunk Air Carriers. Boston: Division of Research, Graduate School of Business Administration, Harvard University, 1972. Good resource that analyzes the competitive environment in the trunk airline industry under the auspices of the Civil Aeronautics Board. Lewis, W. Davis, and Wesley P. Newton. Delta: The History of an Airline. Athens: University of Georgia Press, 1979. Comprehensive review of the history of Delta Air Lines from 1929 to 1979. The authors take an easy-to-read historical point of view rather than conducting a rigorous economic or business analysis. MacAvoy, Paul W., and John W. Snow, eds. Regulation of Passenger Fares and Competition Among the Airlines. Washington, D.C.: American Enterprise Institute for Public Policy Research, 1977. Collection of studies conducted by the United States Department of Transportation and other 639

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public and private agencies regarding the likely impact of deregulation on airline costs and service. Saunders, Martha D. Eastern’s Armageddon: Labor Conflict and the Destruction of Eastern Airlines. Westport, Conn.: Greenwood Press, 1992. An interesting case study that examines the demise of Eastern Airlines from both historical and organizational behavior perspectives. Eastern Airlines was acquired by Texas Air in 1986 and ceased operations in January, 1991. The author analyzes the conflict between Eastern’s unions and Texas Air’s management, especially Frank Lorenzo. Several airlines failed following deregulation, but Eastern’s bankruptcy often is viewed as one of the more tragic. M. Mark Walker Cross-References The DC-3 Opens a New Era of Commercial Air Travel (1936); Amtrak Takes Over Most U.S. Intercity Train Traffic (1970); Congress Deregulates Banks and Savings and Loans (1980-1982); Air Traffic Controllers of PATCO Declare a Strike (1981).

640

THE PREGNANCY DISCRIMINATION ACT EXTENDS EMPLOYMENT RIGHTS The Pregnancy Discrimination Act Extends Employment Rights

Category of event: Labor Time: October 31, 1978 Locale: Washington, D.C. The Pregnancy Discrimination Act expanded employee benefit provisions, clarified the need for nondiscriminatory fetal protection policies, and led to state and federal laws mandating parental leave Principal personages: Susan C. Ross (1945), the codirector of the Campaign to End Discrimination Against Women Workers Jimmy Carter (1924), the president of the United States, 1977-1981 Wendy Williams, a coauthor of the Pregnancy Discrimination Act Summary of Event The passage of the Pregnancy Discrimination Act in 1978 was the first federal attempt to expand rights and protection for pregnant workers. The Pregnancy Discrimination Act (PDA) is an amendment to Title VII of the Civil Rights Act of 1964 and prohibits discrimination in employment based on pregnancy, childbirth, or related medical conditions. Although women are protected by the act against such practices as being fired or being refused a job or promotion because of pregnancy, the major impact of the PDA relates to employment benefit policies. The PDA requires employers with fifteen or more employees to provide the same benefits for pregnancy-related conditions as they provide for other 641

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medical conditions. For example, a woman unable to work for pregnancyrelated reasons is entitled to disability benefits or sick leave on the same basis as an employee unable to work because of physical injuries from an accident. If a firm allows salary continuation for victims of heart attacks, it must do so for pregnant workers as well. It would be illegal, on one hand, to allow eight weeks of unpaid leave for cancer treatment but, on the other hand, to limit maternity leave to four weeks. If employees are entitled to get their jobs back after a leave for surgery or illness, so are women who have been unable to work because of pregnancy. In addition, any health insurance coverage provided must cover expenses of pregnancy-related conditions on the same basis as expenses for other medical conditions. In essence, employers may not differentiate between pregnancy and illness. Changes in the legal treatment of pregnancy discrimination in the work force have their roots in action begun in the 1960’s concerning sex discrimination. The most comprehensive federal law dealing with sex discrimination is Title VII of the Civil Rights Act of 1964. Title VII prohibits discrimination in employment decisions based on race, religion, color, national origin, and sex. Although discrimination in all aspects of employment on the basis of sex was banned, Title VII did not address whether discrimination based on pregnancy was a form of sex discrimination. Congress established an enforcement agency, the Equal Employment Opportunity Commission (EEOC), to administer and interpret Title VII’s provisions. Immediately after the passage of Title VII, the EEOC took the position that denying benefits to pregnant employees would not be discriminatory. Continued congressional debate concerning protection against sex discrimination brought about a reversal of that opinion. In 1972, the EEOC issued its guidelines on discrimination because of sex, which state that work disabilities resulting from pregnancy or pregnancy-related illness are temporary disabilities, and that leave, medical, disability, seniority, and reinstatement rights comparable to those provided to nonpregnant employees must be provided to pregnant employees or those with pregnancyrelated disabilities. Following the issuance of the EEOC guidelines, many states passed legislation requiring employers to offer coverage for pregnancy-related disabilities comparable to that offered for other disabilities. Lower courts consistently ruled that denying benefits to pregnant women that were available to nonpregnant employees violated Title VII. Despite the EEOC guidelines and lower court rulings, many employers tended to treat pregnancy differently from other medical conditions. Frequently, pregnant workers were not allowed to use disability plans, and other benefits such as seniority rights and medical insurance were often discontinued during unpaid mater642

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nity leaves. Female employees challenged such policies and charged that they constituted a form of sex discrimination in employment under Title VII of the Civil Rights Act. Two cases that reached the United States Supreme Court were the catalysts for congressional debate and passage of the PDA. In 1976, the Supreme Court held in Gilbert v. General Electric Corporation that employers could exclude pregnancy-related disabilities without creating sex discrimination. The plaintiff in the case had applied for benefits, under the company’s temporary disability plan, for pregnancy-related complications while she was on maternity leave. The firm refused her claim because she was on maternity leave. She sued under Title VII, and the lower courts ruled in her favor. The Supreme Court, however, held that the denial of disability benefits for a pregnancy-related condition did not constitute discrimination. The Court concluded that men and women were covered for the same risks except for pregnancy, and the exclusion of a risk affecting only women did not constitute discrimination based on sex. One year later, in Nashville Gas v. Satty, the Supreme Court ruled that the denial of sick-leave pay to pregnant employees was not a violation of Title VII. The reaction to these two cases was immediate and intense. A coalition of women’s organizations, civil rights organizations, and labor unions formed in support of legislative reform. Wendy Williams, coauthor of the Pregnancy Discrimination Act, commented at congressional hearings that the Gilbert decision reflected an attitude that women are marginal, temporary workers. To eliminate employers’ use of women’s role as childbearers as a justification for inequitable treatment, Sue Ross, codirector of the Campaign to End Discrimination Against Pregnant Workers, called for an explicit federal law eradicating discrimination based on pregnancy and childbirth. Congress responded by passing the Pregnancy Discrimination Act. Impact of Event The passage of the Pregnancy Discrimination Act was the first attempt at a national policy on maternity that would influence personnel policies related to job security, hiring and promotion, safety standards, and employee benefit plans. Although compliance with the PDA was far from universal, many companies expanded employee benefit plans and initiated innovative programs to help pregnant women in the workplace. The PDA provided employers with the initiative to examine fetal protection policies and laid the foundation for state and federal regulations and laws concerning parental leave. The primary impact of the PDA related to employee benefits plans. 643

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Although some companies provided equal benefits for pregnant and nonpregnant employees prior to the PDA, compliance with the PDA has been far from universal. Subsequent to the passage of the PDA, many companies evaluated their policies and adjusted them in order to comply with the law, while others were unsure as to what was required. Compliance with the PDA is highly correlated with organizational size. Immediately following enactment of the PDA, most large firms had adjusted benefits in order to comply with the law, but noncompliance was common among small organizations. Only about half of the firms with fewer than one hundred employees complied with the PDA by 1981. Small firms that ignored the law claimed that they did not know what was required to comply. A survey of small firms indicated that they were confused as to whether employers were required to provide health insurance, disability insurance, and sick-pay benefits for pregnancy-related conditions or merely to adjust existing benefits to cover pregnancy-related conditions equitably. Prodded by the PDA, some companies expanded employee benefits and incorporated innovative features into their personnel policies. One new feature was to permit new fathers to take up to six months of unpaid leave to care for a newborn. Another benefit extending beyond the PDA requirements related to unpaid leave. American Telephone and Telegraph (AT&T) provided disability payments to pregnant employees before they gave birth and before they were certified as disabled. In drawing up new plans affecting pregnant employees, AT&T adjusted treatment of other employees as well. Employees who were not pregnant also became eligible for time off in advance of an anticipated disability. As a result of the Pregnancy Discrimination Act, some companies instituted programs for pregnant workers aimed at holding down the costs of expanding benefits and maintaining employee productivity. Cash incentives or alternative care arrangements, such as in-home nursing care following the birth, were offered to employees who leave the hospital earlier than expected. Such efforts lowered the cost to employers of health insurance and disability insurance premiums. Numerous companies ran workplace seminars aimed at helping pregnant employees develop good health habits. According to occupational health nurses, these seminars on prenatal health care help reduce absenteeism during pregnancy and reduce the average length of maternity leave. The issue of pregnancy-related discrimination has been examined by employers in the context of fetal protection policies. Companies concerned about reproductive hazards have instituted policies intended to protect fetal health. Some of these policies excluded women from jobs and occupations involving exposure to risks to the fetus. Johnson Controls, for example, 644

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refused to employ women in departments where lead was used because of concern about potential fetal injury. The courts have ruled that policies that exclude women from jobs that may pose hazards to their reproductive health or the health of a fetus are direct violations of the Civil Rights Act of 1964 as amended by the Pregnancy Discrimination Act of 1978 unless the threat cannot be abated by means of control of the risk or other protection from it. In three separate court cases, stringent tests for fetal protection policies were established. The courts ruled that a fetal protection policy may discriminate against women if persuasive evidence exists that the risk to the fetus is real and likely to occur and that the risk is confined to women or fetuses. Employers responded to the prohibition of discriminatory fetal protection policies in several ways. Several large companies initiated research studies aimed at identifying potential connections between occupational exposures and adverse reproductive effects. Larger corporations offered protection from reproductive hazards through temporary job transfers of pregnant workers to jobs of comparable work at equal pay and began taking steps to try to minimize reproductive hazards for both female and male employees. In response to the passage of the PDA, states addressed issues concerning pregnant workers through laws and regulations. Although only a few states had enacted laws pertaining to reproductive hazards by the early 1990’s, a majority of states had addressed some aspect of work as it pertained to pregnant women. A number of states enacted laws or promulgated regulations covering pregnancy under disability laws and prohibiting discrimination in hiring and promotion decisions based on pregnancy. One trend concerns laws governing maternity leave not related to disability. Under the PDA, employers must grant disability leave to pregnant employees to the same extent as offered to other employees for different types of disabilities. The PDA does not require employers to grant leave for child care. Several states passed laws mandating unpaid parental leave or maternity leave. Because the PDA provides for equal treatment, employers must offer the same parental leave to fathers as to mothers. American companies typically did not offer maternity leaves that extended beyond the period of disability. The Family and Medical Leave Act passed by the Bill Clinton Administration addressed that issue. The primary provisions of the FMLA centered on requiring a fixed number of weeks of unpaid parental leave, continued health benefits, and job security. Employers are faced with difficulties in setting parameters with respect to pregnancy leave. Under the PDA, employers are prohibited from placing limits on the length of pregnancy leaves unless they also place identical limits on other disability leaves. This restriction has led to substantial state 645

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legislation regarding family and medical leaves as well as to the proposal of the federal Family and Medical Leave Act. Bibliography Bureau of National Affairs. Pregnancy and Employment: The Complete Handbook on Discrimination, Maternity Leave, and Health and Safety. Washington, D.C.: Author, 1987. Provides an overview of legal developments covering pregnancy discrimination and maternity-leave issues. Reviews issues involving reproductive hazards to pregnant workers. Details programs initiated by employers. Dabrow, Allan, and Gina Ameci. “What You Should Know About Pregnancy and the Law.” Management Review 80 (August, 1991): 38-40. Examines several lawsuits subsequent to the PDA relating to discrimination in employment. Discusses trends relating to parental leave at the state and federal levels. Fried, Mindy. Taking Time: Parental Leave Policy and Corporate Culture. Philadelphia: Temple University Press, 1998. Part of Temple University Press’s Women in the Political Economy series. Kamerman, Sheila B., Alfred J. Kahn, and Paul Kingston. Maternity Policies and Working Women. New York: Columbia University Press, 1983. Discusses why maternity benefits are important and presents the evolution of federal maternity policies for working women. Also discusses the benefits mandated at the state level. Includes examples of maternity benefits from specific companies. Kohl, John P., and Paul S. Greenlaw. “The Pregnancy Discrimination Act: Compliance Problems.” Personnel 60 (November/December, 1983): 65-71. Summarizes the origins of the Pregnancy Discrimination Act and reports the results of a study investigating compliance with the PDA. Zigler, Edward F., and Meryl Frank, eds. The Parental Leave Crisis. New Haven, Conn.: Yale University Press, 1988. Provides a history of maternityleave policies. Discusses why parental leave is important and examines the need for a national parental-leave policy. Useful for understanding the impact of women in the work force on laws and employer policies. Iris A. Pirozzoli Cross-References Congress Passes the Equal Pay Act (1963); The Civil Rights Act Prohibits Discrimination in Employment (1964); Nixon Signs the Occupational Safety and Health Act (1970); The Supreme Court Orders the End of Discrimination in Hiring (1971); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986). 646

THE THREE MILE ISLAND ACCIDENT PROMPTS REFORMS IN NUCLEAR POWER The Three Mile Island AccidentP rompts Reforms in Nuclear Power

Category of event: Consumer affairs Time: March 28, 1979 Locale: Harrisburg, Pennsylvania The nuclear power plant accident at Three Mile Island exposed weaknesses and led to new safety measures designed to avoid a repetition elsewhere Principal personages: Dick Thornburgh (1932), the governor of Pennsylvania, 19791987 William W. Scranton III (1947), the lieutenant governor of Pennsylvania, 1979-1987 Joseph M. Hendrie (1925), the chairman of the U.S. Nuclear Regulatory Commission, 1977-1979 Jimmy Carter (1924), the president of the United States, 1977-1981 Summary of Event On March 28, 1979, the Three Mile Island (TMI) nuclear power plant on the Susquehanna River near Harrisburg, Pennsylvania, nearly suffered a catastrophe as its Unit Two malfunctioned, setting into play events that resulted in the most serious accident to that time in the history of the commercial nuclear power industry. Had it not finally been contained, the malfunction would have resulted in devastation similar to that caused by the plant in Chernobyl, Ukraine, in 1986. 647

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The TMI accident exposed many weaknesses in nuclear power plant design, management, and operation. The ineffectiveness of the Nuclear Regulatory Commission (NRC) and inadequacy of emergency preparedness were also exposed, leading to proposal of many changes by the many investigators deployed to study the event, including a presidential commission and congressional committees, the Nuclear Regulatory Commission, Pennsylvania governmental groups, and industrial organizations. In 1980, the comptroller general published a report to Congress that reviewed eight of the other reports and gave its own independent observations. The Three Mile Island Unit Two, as well as its sister, Unit One, was a pressurized water reactor. It generated electric power by boiling water into steam, which then spun the blades of a turbine generator. The heat to convert the water to steam was produced by chain reaction fission of uranium in the reactor’s core. This core was covered with water as its primary coolant and encapsulated in a structure forty feet high with walls of steel eight inches thick. The coolant was radioactive and under pressure, which allowed it to be superheated to 575 degrees Fahrenheit without boiling. It then was pumped to a steam generator, where the coolant heated cooler water in a secondary system. Under less pressure, the water turned to steam and spun turbine blades, propelling a generator. The steam passed through a condenser, changing it back to water. It then began its circuit through to the boiler and back again through this secondary system, also called the “feedwater” circuit. At 4 a.m. on Wednesday, March 29, 1979, two pumps in this system shut down; the steam turbine followed a few seconds later. Its steam was released. What little coolant was left in the secondary system boiled. The primary coolant could not transfer its heat load and it too began to boil, increasing pressure in the reactor and in the primary system. A relief valve opened, allowing radioactive water and steam to drain into a tank to prevent a primary coolant explosion. This valve should have shut off after thirteen seconds, but it remained open for more than two hours. Less than a minute later, emergency backup pumps automatically engaged to add water to the secondary system. No water was added, however, because valves controlling the flow had been closed for maintenance two weeks earlier. According to Nuclear Regulatory Commission rules, the plant was to be shut down if these valves were closed for more than seventy-two hours. Two minutes into the crisis, the emergency core coolant system kicked in to add water to the reactor core. Technicians, however, believed that the reactor was already full of water. They also assumed that the pressurizer relief valve was closed when it was not. Four minutes later, with pressure in the primary cooling loop high, it was thought that the system was filling with water. Since additional increases in 648

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pressure could cause the system to blow, one emergency pump was stopped. Twelve and one-half minutes into the incident, the other was reduced to one-half speed. This was proper procedure, since the attendants believed the system was filling with water. This condition is known as “going solid” and must be avoided to lessen the possibility of the primary system’s breakdown. The reactor core in fact was not covered by water, and temperatures began rising toward the meltdown point of 5,000 degrees Fahrenheit. There were no meters that could measure the depth of water in the reactor core, so the operators could only guess about this critical information. At eight and one-half minutes into the crisis, the closed valves on the feedwater system were opened, filling the secondary system with water, which helped to draw heat from the primary system. The relief valve allowed primary cooling water to drain into a tank that spilled its radioactive water onto the containment building’s floor. The water then was pumped into a tank in the nearby auxiliary building. Radioactivity was released in this final procedure at 4:38 a.m. Pockets of steam collected in two sets of pumps for reactor cooling, resulting in vibrations that caused them to be turned off. With no cooling system in operation, the reactor suffered severe damage. The twelve-foottall fuel rods were only half covered with water. The shields around the rods themselves were destroyed by the intense, rising heat, releasing radioactive debris into the primary coolant, which itself was spilling onto the floor. Hydrogen and radioactive gases from the coolant collected in the containment building. Radiation levels rose within the buildings and was released into the atmosphere. At 6:50 a.m., a general emergency was declared. Early Wednesday afternoon, hydrogen that had accumulated in the containment building exploded. Hydrogen continued to be created by the uncovered core, fueling fears of a catastrophic explosion. Another scenario envisioned was the so-called “China Syndrome.” In the scenario, the core would become so hot (about 5,200 degrees Fahrenheit) that it would melt. This superheated material would bore its way through the bottom of the plant and down through the ground until it hit water. The water would become high-pressure steam and would erupt from the earth, spewing radioactivity into the air all around the plant. A typical nuclear reactor could release about the same radiation as would a thousand bombs of the size used at Hiroshima. A 1975 study estimated that a plant slightly larger than Three Mile Island could cause thirty-three hundred deaths and forty-five thousand radiation injuries immediately. Forty-five thousand cancer and forty thousand thyroid tumor fatalities would result in the longer term. Fourteen billion dollars of damage to property would also occur. 649

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Controlled and uncontrolled radiation leaks from the plant continued through Wednesday, March 28, and Thursday, March 29. On Friday, Governor Richard Thornburgh ordered an evacuation of pregnant women and small children within five miles of the facility. A hydrogen bubble began to grow in the reactor vessel. It was thought that it could self-ignite in five to eight days, resulting in a possible meltdown. A general evacuation was considered by Thornburgh and Lieutenant Governor William W. Scranton III but was not ordered. It was thought that it might set off an evacuation panic and result in more injuries than it might prevent. On Saturday morning, John Herbein, the Metropolitan Edison vice president for generation, said that the bubble had decreased in size by two-thirds and that the danger was over. Harold Denton of the NRC disagreed and said that the bubble actually had increased in size. Lack of information, poor communication among the numerous people from the varied agencies involved, incorrect wire service reports, and alarmist news reports fueled the mounting alarm on the part of the public, both locally and nationally. More than half of the families within a twelve-mile radius of the plant evacuated at least one member. Later on Saturday, Harold Denton told Thornburgh that the size of the hydrogen bubble had been reduced. Joseph M. Hendrie, a commissioner of the NRC, had a group working on the same problem. They reported that the bubble could be explosive in six or seven days. On the afternoon of Sunday, April 1, President Jimmy Carter visited the facility. At about the same time, the hydrogen bubble shrank, eliminating the possibility of explosion, and the crisis wound down. Impact of Event Numerous changes were made in the operation of nuclear power plants as a result of the Three Mile Island incident. This was a contingency for which there had been no plan, since it was thought to have a negligible probability of happening. Until TMI, nuclear plants were constructed with three levels of safety built in, known as “defense in depth.” The first level involved using quality construction standards and emergency practices to prevent accidents. It is inevitable that mistakes will be made, accidents will happen, and equipment will break down. These factors required another level to prevent or control their effects. These were built into the original design. The last level of safety assumed that special design features would fail. The containment building could mitigate or slow the release of radioactive particles from the plant should that happen. In a complete meltdown, the core would eat through the floor of the 650

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plant, contaminating the groundwater supply. Radiation might also quickly breach the containment building and result in many deaths and injuries. Because it might be impossible to contain a meltdown, design features to delay the release of radioactivity were suggested. They provided more time to evacuate the area. They included core “catchers” to slow the core melting through the floor, a filtering system to provide for filtering and release of gases in the containment building to prevent overpressurization, and hydrogen control systems to prevent or minimize the formation of a hydrogen bubble, which was so potentially dangerous at TMI. Control room design changes were adopted that made controls more recognizable and accessible to operators in emergency situations. Prior to 1979, nuclear plants were located close to major population areas. It was thought that the probability of radiation exposure to the public was quite small. After the accident, it became apparent that anything made by man was subject to failure. A return to the policy of constructing plants far from populated areas was thought to be prudent. The inadequate qualifications and training of operators contributed to the severity of the accident. Training programs had been geared toward running the plant under normal conditions rather than under stressful emergencies. Supervisory and management personnel knew little about actual operations and were not able to help the operators mitigate problems. The Nuclear Regulatory Commission now requires more operators, who are better qualified and have passed a more stringent licensing examination. Supervisors need engineering expertise, training is more rigorous, and simulators are used to prepare operators to deal with emergency situations, sometimes even duplicating the TMI conditions. Studies found that initial situations similar to that at TMI had occurred at other plants, but operators were able to react before a major emergency developed. There was no system in place at the NRC or within the nuclear power industry to collect or distribute information to other operators about the problems encountered. A system to review and analyze information was implemented to collect data on American and foreign nuclear reactors. The Office for Analysis and Evaluation of Operating Data was created to be the focal point of this effort. At the time of the TMI accident, the quality assurance programs of both Metropolitan Edison and the NRC were deficient. Standards used in the construction and operation of power plants were to be monitored by an independent department within each utility to ensure compliance. The NRC reviewed the utilities’ efforts. These standards did not apply to equipment unrelated to safety or to radiation survey monitors. Equipment not related to safety had a significant involvement in the accident, and many of the 651

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radiation monitoring instruments at TMI did not work. An acknowledgment from the NRC that rigid quality assurance standards and their strict implementation were essential was expected to lessen the likelihood of a future similar event. Emergency procedures on the part of the NRC and state and local governments were found to have been lax or nonexistent. The accident demonstrated that an emergency was possible, prompting emergency and evacuation plans to be implemented or upgraded for existing nuclear power plants. In addition, operating licenses would be granted to new nuclear generating plants only if state and local governments had federally approved emergency plans. The Federal Emergency Management Agency, rather than the NRC, became responsible for evaluating emergency plans. During the emergency, numerous TMI employees were assigned various emergency response duties. Many had received no training and did not understand what needed to be done. Additionally, half of the radiation dose rate monitors were not operable. The NRC became more rigorous in requiring emergency training and equipment maintenance. Each of the five members of the Nuclear Regulatory Commission had equal responsibility and authority in all decisions in 1979. The chair had vaguely defined administrative and executive functions, but decision-making power lay with joint action of the commissioners and not with the chair. With no one ultimately in command, slow, inefficient management resulted. After reorganization of the NRC in 1980, the chair had more power, although the commission as a whole still set the framework within which the chair could operate. The chair was allowed to act in the name of the commission in an emergency, determining policies, giving orders, and directing all actions concerning the emergency. The chair gained the ultimate responsibility for emergency decision making. This was expected to provide more timely responses instead of the delays involved with management by committee. Overall, the TMI accident prompted reconsideration of nuclear power as a source of energy. Although relatively inexpensive, nuclear power posed the risk of disasters and the problem of nuclear waste disposal. Regulators had to decide how many costly safety requirements to impose, and the federal government faced choices of which energy sources to promote and even whether to allow construction of new nuclear power plants. The 1986 nuclear disaster at Chernobyl renewed these concerns worldwide. Bibliography Cantelon, Philip L., and Robert C. Williams. Crisis Contained: The Department of Energy at Three Mile Island. Carbondale: Southern Illinois 652

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University Press, 1982. Evaluation of the Department of Energy’s performance during the emergency. Del Tredici, Robert. The People of Three Mile Island. San Francisco: Sierra Club Books, 1980. Interviews with local people and others connected with the event. Gray, Mike, and Ira Rosen. The Warning: Accident at Three Mile Island. New York: W. W. Norton, 1982. A very readable investigative report that dramatically pulls the reader through the complex events of the Three Mile Island disaster itself after reviewing prior problems experienced at other nuclear plants. Less technical than some of the other publications; fast and informative reading. Ramsey, Charles B. Commercial Nuclear Power: Assuring Safety for the Future. New York: J. Wiley, 1998. Sorensen, John H., Jon Soderstrom, Emily Copenhaven, Sam Carnes, and Robert Bolin. Impacts of Hazardous Technology: The Psycho-Social Effects of Restarting TMI-1. Albany: State University of New York Press, 1987. Reviews the background of TMI and projects the effects of starting the undamaged sister reactor, TMI-1. Starr, Philip, and William Pearman. Three Mile Island Sourcebook: Annotations of a Disaster. New York: Garland, 1983. This book is divided into three sections. The first provides a chronology of media coverage from TMI’s announcement of opening in 1966 until 1981. Three local newspapers, The New York Times, and Newsweek are surveyed. The next section is annotations of state and federal documents. The last covers books, articles, and other publications written about TMI. Stephens, Mark. Three Mile Island. New York: Random House, 1980. Written by a staff member of the presidential commission. Recounts the immediate events of the incident and offers suggestions to avoid future problems. U.S. General Accounting Office. Three Mile Island: The Most Studied Nuclear Accident in History. Washington, D.C.: Author, 1980. This inquiry was made to determine whether the investigations done up to that time were thorough and accurate in their presentation of the facts and their conclusions as to the causes of the accident. Eight investigative reports, as well as other materials, were reviewed. The General Accounting Office found that although reports varied as to depth and detail, the facts and conclusions were consistent. Equipment breakdowns, insufficient training of operators, poor design, and inadequate emergency and operating procedures were the chief culprits. Blame was also placed on the Nuclear Regulatory Commission with its poor structure, practices, and attitudes. John R. Tate 653

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Cross-References The U.S. Government Creates the Tennessee Valley Authority (1933); GPU Announces Plans for a Commercial Nuclear Reactor (1963); The Environmental Protection Agency Is Created (1970); The United States Plans to Cut Dependence on Foreign Oil (1974); The Alaskan Oil Pipeline Opens (1977).

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THE SUPREME COURT RULES ON AFFIRMATIVE ACTION PROGRAMS The Supreme Court Rules on Affirmative ActionPr ograms

Category of event: Labor Time: June 27, 1979 Locale: Washington, D.C. In United Steelworkers of America v. Weber, the Supreme Court upheld the legality of preferential treatment in the Weber case, making it possible for affirmative action programs to continue Principal personages: Brian Weber (1946), a production worker at Kaiser Aluminum, Inc. William J. Brennan, Jr. (1906-1997), the Supreme Court justice who wrote the majority opinion William H. Rehnquist (1924), the Supreme Court justice who wrote the dissenting opinion Summary of Event The passage of Title VII of the Civil Rights Act in 1964 made it illegal for employers to discriminate against anyone on the basis of race, sex, color, religion, or national origin. Title VII was supposed to create an atmosphere of equal opportunity, in which all candidates theoretically had the same chance to secure a job and other employment benefits. It was soon recognized, however, that prohibiting present and future discrimination would not fully remedy the consequences of past discrimination. Members of groups disadvantaged by prior discrimination did not have the experience, credentials, status, or contacts to compete on an equal footing with those who had never been the target of discrimination. The government therefore imposed on federal contractors the duty to 655

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undertake “affirmative action,” that is, to engage in special efforts to hire and promote members of groups that were underrepresented in their work forces. The overall goal was to bring groups that had been discriminated against into statistical parity in the work force at a faster than natural rate. Affirmative action required employers to compare the relevant labor market to their present labor force and to identify discrepancies and situations in which minorities and women were underrepresented. They then had to file written affirmative action plans that included goals, timetables, and strategies to correct the deficiencies. Opponents soon chose to test the validity of affirmative action by questioning the legality of the results the legislation created. Affirmative action has been interpreted in several ways. It was commonly understood that an employer undertaking affirmative action would actively recruit underrepresented groups, eliminate managerial prejudices toward underrepresented groups, and remove employment practices that put victims of previous discrimination at a disadvantage. There has never been a question about the legality of these types of practices. To most employers, however, the safest way to comply with affirmative action involved extending preferential treatment to qualified members of underrepresented groups through the use of hiring quotas. This meant, for example, that if women were underrepresented in a particular company, and a woman and a white man applied for a job and had the same qualifications, the woman would be given preference. At the extreme, quotas might also result in less-qualified women and people of color being preferred over white men. Such practices resulted in what was called reverse discrimination against members of groups that were adequately represented, in particular, white men. Such a result appeared to be in conflict with Title VII (section 703), which specifically prohibits employment discrimination based on race, gender, color, religion, or national origin. The basic issue was therefore whether an affirmative action plan that classifies people according to their race, gender, and national origin and then makes employment decisions at least partially based on those classifications violated Title VII. Opponents of affirmative action argued that its practical effect mandated preferential treatment for certain groups of people, while Title VII specifically stated that it did not require the granting of preferential treatment. A series of court cases, most of which reached the Supreme Court and culminated in the ruling in United Steelworkers of America v. Weber, eventually decided the fate of affirmative action. The Supreme Court initially seemed to take a position against preferential treatment, in Griggs v. Duke Power Co. (1971). This case concerned a company that had unintentionally produced a discriminatory effect against 656

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African Americans by requiring tests and educational credentials that were not job related. The decision made it clear that the court considered these practices to be violations of Title VII and that artificial and unnecessary barriers to employment had to be removed. The court also specifically stated, however, that no person or group had a right to preferential treatment simply because of membership in a particular group or because of being the target of prior discrimination. The arguments against preferential treatment seemed to grow stronger in 1976 with McDonald v. Santa Fe Trail Transportation Company. Three men, two white and one black, were charged with the same indiscretion. The company fired the two white men but gave the black man a warning. The two white men charged the company with discrimination, but the company responded that Title VII was meant to protect the disadvantaged and that the two white men therefore had no protection. The Supreme Court disagreed, eventually ruling that the term “race” was all-inclusive and Title VII therefore also prohibited discrimination against whites. Another 1976 ruling, this time by a lower court, ordered American Telephone and Telegraph (AT&T) to pay damages to a white man who had lost a promotion to a woman with less experience and seniority. The promotion decision had been made in the context of a federal consent decree, in which AT&T had agreed to hire and promote women and people of color into jobs previously dominated by white men. The male employee believed that he was nevertheless the victim of sex discrimination, and the court agreed, contending that “innocent employees” should not be made to pay for a company’s past discriminatory practices. A more direct blow was dealt to affirmative action in Regents of the University of California v. Bakke (1978). The university reserved a percentage of its medical school openings for minority students. A white applicant was denied admission to the University of California at Davis Medical School because the white allotment had been filled and the only slots open were those saved for minority candidates. In a narrow and indecisive ruling, the Supreme Court affirmed a lower court order to admit Allan Bakke to the medical school, claiming that the university’s admission system violated both the Constitution’s equal protection amendment and Title VII. The Court made it clear that quotas based exclusively on race were illegal in a situation in which no previous discrimination had been shown. The justices did not, however, outlaw the use of quotas in situations where previous discrimination had occurred. The Supreme Court further muddied the waters when it also ruled that although race could not be the sole deciding factor, the university could continue to take race into consideration in its selection system. 657

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The net effect of these decisions placed employers in a difficult position and affirmative action in potential jeopardy. In the light of the various rulings, employers believed that they had to find ways to increase the presence and position of underrepresented groups without causing any discrimination against the white majority. Such a balancing act was extremely difficult, if not impossible. The controversy was finally decided in 1979 with United Steelworkers of America v. Weber. In 1974, the United Steelworkers of America and Kaiser Aluminum voluntarily entered into a fifteen-plant collective bargaining agreement that included an affirmative action plan designed to remedy racial imbalances in Kaiser’s skilled craft work force. The plan reserved half of the openings to in-house craft training programs for African Americans until the percentage of black craft workers at Kaiser mirrored the local labor force. The litigation arose from a charge at the Gramercy plant in Louisiana, where 1.83 percent of the skilled craft workers were black, while 39 percent of the local work force was black. After the plan was put into operation, seven black and six white workers were selected from the production work force to enter the training program. Brian Weber, a white production worker, bid for admission into the program and was rejected; he had more seniority than all the black workers who were selected. Weber subsequently filed a class action suit, alleging that the plan discriminated against whites and was therefore in violation of Title VII. The basic issue was whether a private sector employer could voluntarily implement an affirmative action plan that involved preferential treatment when there was no proof of prior discrimination but the work force did demonstrate racial or sexual imbalance. The majority opinion, authored by Justice William J. Brennan, Jr., ruled that any employer or union that was trying to eliminate imbalances in its work force could voluntarily use a plan that involved preferential treatment, even if that plan benefited individuals who had not themselves been the victims of discrimination. In reaching this decision, the justices emphasized that Kaiser’s affirmative action plan was the result of negotiation and agreement between the company and the union. The Supreme Court further stipulated that although Title VII does not require preferential treatment, neither does it prohibit it. The Weber decision did not legitimize all quota systems. It stated that in order for a quota system to be lawful, it must be part of a permissible affirmative action plan. The court offered the following guidelines as to what constitutes a permissible affirmative action plan: It is designed to break down old patterns of discrimination; it does not needlessly trammel the interests of white employees; it does not create an absolute bar to whites; it is a temporary corrective measure; and it has the goal of eliminating racial imbalance. 658

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There was a strong dissent in the Weber case, authored by Justice William H. Rehnquist. The minority quoted convincing evidence from the Congressional Record that indicated that some members of Congress, including strong proponents of the bill, did indeed intend that Title VII prohibit all preferential treatment. Impact of Event Review of the findings of Weber and the previous cases results in a four-faceted scenario. If an employer has been found guilty of employment discrimination, affirmative action involving preferential treatment appears to be sanctioned by Title VII, which allows the courts to impose any relief or affirmative action deemed appropriate. In these cases, the affirmative action is viewed as a remedy for illegal behavior, that is, a way to redress an imbalance created by deliberate discrimination. On the other hand, if an employer has an imbalanced work force but has not been found guilty of discrimination, the courts have no power to order any plan involving preferential treatment. A firm is free, however, to voluntarily adopt measures that result in preferential treatment, provided they are part of a permissible affirmative action plan. Although “permissible” has never been specifically defined, the five criteria laid out in Weber are regarded as useful guidelines. Finally, a firm cannot voluntarily adopt preferential treatment tactics that are not part of a permissible affirmative action plan. The Weber ruling is especially noteworthy because it is one of the few in judicial history in which a court has rejected the actual wording of a statute in favor of what it interprets as the legislative intent. The Court acknowledged that Title VII does indeed prohibit all racial discrimination but contended that the law had to be interpreted in the context of the history and purpose of Title VII. The Court held that the primary concern of Title VII was the plight and position of African Americans, and it was therefore illogical to assume that the act would therefore ban all voluntary and race-conscious efforts to correct the effects of past discrimination. In effect, the Court said that despite the inevitable result of reverse discrimination, preferential treatment is permissible when its goal is the correction of longstanding social problems. Based on this reasoning, and despite subsequent challenges, most major firms in the United States implemented affirmative action, and most plans involved some degree of preferential treatment. The battle, as of the early 1990’s, was probably far from over. From its inception, affirmative action has had its detractors and its defenders. Both proponents and opponents of affirmative action continued to make valid and legitimate points about the evils and the benefits of preferential treat659

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ment. Some voiced moral and societal objections; opponents protested that it is unfair to require present generations to pay for the sins of predecessors, that affirmative action causes discrimination against white men, and that all employment decisions should be based solely upon merit. Detractors further argue that any legislation that allows preferential treatment is bound to increase hostility toward the groups it is meant to help. Others point out, however, that to rely on the natural progression of time to correct the effects of past discrimination would take far too long and would perpetuate an untenable situation. Although the Weber ruling may have settled prominent legal questions about preferential treatment and affirmative action, it by no means ended the controversy. The continuing debate again took center stage in the late 1980’s, when a more conservative Supreme Court handed down a series of decisions unfavorable to affirmative action and equal employment opportunity legislation. Congress quickly responded with the Civil Rights Act of 1991, which basically undid all the conservative Court decisions. Legislative and judicial activity continued to generate uncertainty for businesses, as they did their best to hire and promote women and people of color while still trying to treat individual white men fairly. This balancing act appeared to be producing mixed results. Because of affirmative action, women and people of color gained entry into organizations, but they were not being promoted into higher and more influential positions. Whether affirmative action can be declared a success, therefore, had yet to be determined. Bibliography Buchholz, Rogene A. “Equal Employment Opportunity.” In Business Environment and Public Policy. 4th ed. Englewood Cliffs, N.J.: PrenticeHall, 1992. Chapter 12 provides a concise and understandable synopsis of affirmative action. Gives insight to both sides of the issue. Excellent summary of major cases dealing with affirmative action. Dudley, William, ed. “Does Affirmative Action Alleviate Discrimination?” In Racism in America: Opposing Viewpoints. San Diego, Calif.: Greenhaven Press, 1991. Presents a series of articles arguing both for and against affirmative action. Provides moral and societal context. Lively style, interesting points. Eisenberg, Theodore. Civil Rights Legislation. 3d ed. Charlottesville, Va.: Michie, 1991. Provides a lengthy reprint of the Weber ruling and other significant affirmative action cases. Written in lawbook fashion. Somewhat difficult to understand for those not versed in the law. Hall, Kermit L., ed. The Oxford Guide to United States Supreme Court 660

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Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Ledvinka, James, and Vida Scarpello. Federal Regulation of Personnel and Human Resource Management. 2d ed. Boston: PWS-Kent, 1991. Provides an excellent history of the controversy surrounding preferential treatment. Easy to read. Player, Mack. Federal Law of Employment Discrimination in a Nutshell. 3d ed. St. Paul, Minn.: West, 1992. A “nutshell” reference guide to employment discrimination law. Lays out highlights in a brief, orderly fashion. Weiss, Robert J. “We Want Jobs”: A History of Affirmative Action. New York: Garland, 1997. Marie McKendall Cross-References Congress Passes the Equal Pay Act (1963); The Civil Rights Act Prohibits Discrimination in Employment (1964); The Supreme Court Orders the End of Discrimination in Hiring (1971); The Pregnancy Discrimination Act Extends Employment Rights (1978); Firefighters v. Stotts Upholds Seniority Systems (1984); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986); Bush Signs the Americans with Disabilities Act of 1990 (1990).

661

AMERICAN FIRMS ADOPT JAPANESE MANUFACTURING TECHNIQUES American Firms Adopt Japanese ManufacturingTechniqu es

Category of event: Manufacturing Time: The 1980’s Locale: The United States American firms, in response to gaps in productivity and quality, adopted various techniques developed in Japan Principal personages: Taiichi Ohno (1912-1990), a vice president of Toyota Motor, inventor of just-in-time concepts Shigeo Shingo (1909-1990), an engineer and consultant who invented just-in-time inventory practices in collaboration with Ohno ), the president of Toyota Motor Kiichirf Toyoda (1925Summary of Event The adoption of just-in-time inventory practices by American firms in the early 1980’s helped American industry to respond to the Japanese challenge. Firms were making vigorous efforts to close gaps in their productivity and quality, which had both fallen behind the performance of Japanese firms. The United States had been directly confronted by the productivity and quality levels achieved by Japanese industry, which seriously threatened the competitiveness of American firms. The typical Japanese business orientation maintained that a company that allows exploitation, including that of consumers, cannot achieve longterm success. The astonishing results obtained in Japan through focusing 662

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on quality, long-range strategic planning, partnership with suppliers, and adoption of the principle that the employees are the company necessitated a rethinking of priorities and a change of outlook on the part of American industry. Many Western managers believed that Japanese techniques could not be applied in Western companies and that matching Japan’s successes would be impossible. Evidence refuted notions that these accomplishments resulted from cultural differences, and managers became willing to experiment with the techniques. Japan’s fundamental economic goal since 1945 had been to achieve full employment through industrialization. As a means of attaining this goal, the Japanese employed a strategy to gain dominance in selected product areas. They imported technology, concentrated on achieving high productivity, and embarked on a drive to improve quality and reliability. Two basic concepts behind the drive toward dominance were elimination of waste and respect for people. Elimination of waste involved such tactics as keeping plants small and specialized, using workers in groups to take advantage of teamwork and cooperation, producing with just-in-time methods, and minimizing setup times for jobs. Respect for people involved lifetime employment, unions sponsored by companies, use of automation and robotics to eliminate tedious and dangerous tasks for humans, management by consensus or committee, and quality circles. The Japanese recognized that every worker could make a contribution, often beyond his or her immediate tasks, and that suppliers often could assist in improving a company’s productivity or in reducing its costs. Some of the new Japanese techniques were difficult to translate into the American industrial environment because of cultural factors or resistance on the part of workers. Many, however, were appropriate and practical, such as the just-in-time philosophy, minimized setup time, and concentration on quality. The just-in-time philosophy acted as a framework and organizing principle for other innovations. Most accounts agree that the just-in-time philosophy was developed in Japan at Toyota Motor Corporation. Until the late 1970’s, the technique was limited in use to Toyota and its family of key suppliers. In 1949, Toyota had found itself on the brink of bankruptcy. At that time, the United States was far more productive than Japan in automobile production. Kiichirf Toyoda, president of Toyota Motor Corporation, issued a challenge to his company to catch up with the United States within three years. Responding to the challenge, Taiichi Ohno, a company vice president, pointed out that the lack of success was a result of wastefulness in the production process. Ohno proceeded to organize a production system dedicated to elimination of waste. In collaboration with Shigeo Shingo, an engineer, he invented the 663

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just-in-time system. Under that system, parts arrive at the company or at individual workstations just in time for their use, rather than being stockpiled. The company thus saves the costs of carrying large inventories of parts or components. The system also encourages greater coordination of plans both within the company and with outside suppliers. Toyota’s subsequent success has been attributed to implementation of an integrated production system based on the elements described previously. The system, however, was not a quick solution to management problems. Experts estimated that such a system might take as long as ten years to develop and integrate because it involved such a radical overhaul of management philosophy and worker orientation to jobs. Ohno realized that managers needed to change their concept of how business was done, at all levels of the company. The secret of success was a never-ending search for improvements in productivity and quality. Ohno was inspired by his observation of an American supermarket, in which items selected from shelves by customers were replaced just in time for the next round of customers. He saw that as a model of efficiency. The production system developed at Toyota did not receive much attention until the 1970’s, when other Japanese firms began to recognize the potential suggested by the system. During the late 1960’s, managers in the United States began to realize that systems for production management and

In order to compete with Japanese imports, American automobile manufacturers have had to adopt elements of Japanese manufacturing techniques. (PhotoDisc)

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scheduling were imposing costs that were larger than necessary. Managers therefore began to concentrate on efficiency in production. At the same time, however, firms were also concerned with diversifying into new fields and improving the quality of their products. Within this context, the emphasis on efficiency was lost. The financial burden associated with large inventories produced a revolution in production scheduling and resulted in a shift in priority to focusing on reducing inventory costs through such just-in-time systems as materials requirement planning (MRP). The conviction that MRP was the answer to the just-in-time challenge survived until the mid-1970’s, when American managers noticed that Japanese firms operating without MRP still obtained better results. As they studied the Japanese approach, American managers noticed that it was considerably simpler. To attain the best results, however, it was necessary to introduce radically new approaches and modes of thinking. Impact of Event A survey in 1984 found that American firms that had applied just-in-time methods had obtained extraordinary results. Not uncommon were 90 percent reductions in throughput time, 90 percent reductions of work in process, 10 to 30 percent reductions in manufacturing costs, 75 percent reductions in setup times, and 50 percent reductions in the floor space required for production. Similarly, a study of eighty European plants revealed typical benefits of 50 to 70 percent reductions in throughput time, 50 percent reductions in average inventories, 20 to 50 percent increases in productivity, 50 percent reductions in setup times, and an average payback for investments in just-in-time methods of less than nine months. In 1976, a Quasar plant in Chicago that manufactured Motorola television sets was purchased by Matsushita. Within two years, with the same full-time work force, Matsushita doubled output, increased product quality twentyfold, and reduced the costs of servicing warranties by more than 90 percent. General Motors began using Japanese techniques in 1980 and soon cut inventory costs by about 75 percent, increasing the turnover of inventories almost fivefold. Other American automobile manufacturers obtained similar results. General Electric, Westinghouse, and RCA also reported impressive results. The computer system division of Hewlett-Packard increased productivity by 55 percent, decreased welding defects by more than 90 percent and rejected items by 95 percent, and reduced the lead time for production by 90 percent. Other American companies that profitably adopted Japanese production techniques, including just-in-time inventory practices, included 665

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Black & Decker (power tools), Deere & Company (heavy machinery and farm equipment), and American Telephone and Telegraph. In Europe, gains were equally impressive. Firms benefiting from the techniques were as diverse as Olivetti (typewriters), Michelin (steel cord), Fiat (aircraft engine parts), Famitalia Carlo Erba (pharmaceuticals), Lever Industriale (detergents), and Europa Metalli (metals). Just-in-time practices were applied to processing industries such as production of chemicals, pharmaceuticals, and metals as well as to production to order and to more traditional manufacturing. Just-in-time practices proved applicable in service industries as well as in the factory. The successes, however, did not mean that implementation of Japanese production techniques was free of problems or provided the solution to every difficulty. Many problems refused to go away quickly. Resistance to change by both managers and workers, underestimation of education and training needs, shortages of parts or components as production scheduling changed, and lack of commitment were commonly reported. The 1980’s will be remembered as a period of dramatic change in Western manufacturing. Changes for the most part had their source in the overwhelming success of Japanese industry in lowering costs and improving quality, as demonstrated by Toyota, Suzuki, and many manufacturers of electronic components, among other firms. Once they realized that they had fallen behind in the productivity race with Japan, many Western managers thought that they were beaten. Until the end of the 1970’s, many of them believed that catching up would be impossible. They had preconceived notions about the sources of Japanese success, including a belief that Japan had unbeatable advantages in labor costs, the number of labor hours per worker, worker attitudes, and punctual suppliers. Western managers did not believe that these conditions could be matched in their environments. Facts soon demolished all of these alibis for poor performance, and Western managers had no choice but to try to understand the Japanese lesson and make serious efforts to close the productivity and quality gaps. The Japanese successes particularly affected American industry, as the two countries competed in many product lines, but other countries also found themselves challenged. American managers launched their own revolutions in strategy, organization, management, and workplace culture, sometimes modeling efforts on Japanese successes and other times creating new techniques to fit the American environment. Management philosophy came to accept that quality rather than efficiency was the top priority and that operating horizons had to be expanded beyond the short term to achieve long-term success. Clients were to be satisfied as well as possible, even if that meant spending money in the short 666

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term. Suppliers were partners in the production process, and employees were not merely suppliers of labor but instead could make valuable contributions through their ideas and simply through becoming more motivated and more concerned about the welfare of the company. Further developments set in motion by the advent of just-in-time techniques included focusing on rapid development and introduction of new product lines and achieving competitive advantage through flexibility in manufacturing. Bibliography Cutcher-Gershenfeld, Joel. Knowledge-Driven Work: Unexpected Lessons from Japanese and United States Work Practices. New York: Oxford University Press, 1998. Hay, Edward J. The Just-in-Time Breakthrough. New York: Wiley, 1988. A dynamic, comprehensive, practical, and clearly written explanation of just-in-time concepts and their relationship to quality, vendors, management, systems, and technology. Written from the perspective of an experienced practitioner. Outlines the process of getting started and cautions against the pitfalls. Hernandez, Arnaldo. Just-in-Time Manufacturing: A Practical Approach. Englewood Cliffs, N.J.: Prentice-Hall, 1989. Explains the fundamental concepts from a theoretical angle, covers critical operational rules, and provides specific instructions for starting a just-in-time system from scratch. Shows how the concepts apply to all levels in the organization, for both workers and management. Hirano, Hiroyuki. J.I.T. Factory Revolution: A Pictorial Guide to Factory Design of the Future. Cambridge, Mass.: Productivity Press, 1989. An encyclopedic picture book of just-in-time practices. Shows how to set up each area of a plant and provides many useful ideas for implementation. Simply, easy-to-read text. Pictures provide a vivid depiction of work in a just-in-time environment. Japan Management Association, ed. Kanban and Just-in-Time at Toyota: Management Begins at the Workplace. Translated by David J. Lu. Rev. ed. Cambridge, Mass.: Productivity Press, 1989. Based on seminars at Toyota, one of the best practical introductions to just-in-time procedures. Explains every aspect in clear and simple terms. Discusses the underlying rationale, system setup, getting everyone involved, and refining the system once in place. Merli, Giorgio. Total Manufacturing Management. Cambridge, Mass.: Productivity Press, 1990. Provides a thorough comparison of Western and Japanese management approaches and cultural distinctions. Develops a model for production organization and integrates the tools and methods 667

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that support this model. Lays out the principles and steps for just-in-time practices and offers a powerfully integrated strategy and implementation plan. Ohno, Taiichi. Toyota Production System: Beyond Large-Scale Production. Cambridge, Mass.: Productivity Press, 1988. Written to enable people to understand the system correctly and implement it successfully in their own plants. The emphasis is on concepts, with only a few case studies. Based on the knowledge and experience of one of the originators of just-in-time procedures. Shingo, Shigeo. A Study of the Toyota Production System from an Industrial Engineering Viewpoint. Cambridge, Mass.: Productivity Press, 1989. Written by one of the inventors of the just-in-time system. Explains the philosophy, highlights the system’s important aspects, provides additional information, and criticizes weaknesses. Aims to treat the subject in such a way that special features will stand out. Kambiz Tabibzadeh Cross-References Ford Implements Assembly Line Production (1913); The U.S. Government Reforms Child Product Safety Laws (1970’s); Nader’s Unsafe at Any Speed Launches a Consumer Movement (1965); CAD/CAM Revolutionizes Engineering and Manufacturing (1980’s); Electronic Technology Creates the Possibility of Telecommuting (1980’s).

668

CAD/CAM REVOLUTIONIZES ENGINEERING AND MANUFACTURING CAD /CAM Revolut ionizes Engineering and Manufacturing

Category of event: Manufacturing Time: The 1980’s Locale: The United States Computer-Aided Design (CAD) and Computer-Aided Manufacturing (CAM) enhanced flexibility in engineering design, leading to higher quality and reduced time for manufacturing Principal personages: Patrick Hanratty, a General Motors Research Laboratory worker who developed graphics programs Jack St. Clair Kilby (1923), a Texas Instruments employee who first conceived of the idea of the integrated circuit Robert Noyce (1927-1990), an Intel Corporation employee who developed an improved process for manufacturing integrated circuits on microchips Don Halliday, an early user of CAD/CAM who created the Made-inAmerica car in only four months by using CAD and project management software Fred Borsini, an early user of CAD/CAM who demonstrated its power Summary of Event Computer-Aided Design (CAD) is a technique whereby geometrical descriptions of two-dimensional (2-D) or three-dimensional (3-D) objects can be created and stored, in the form of mathematical models, in a 669

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computer system. Points, lines, and curves are represented as graphical coordinates. When a drawing is requested from the computer, transformations are performed on the stored data, and the geometry of a part or a full view from either a two- or a three-dimensional perspective is shown. CAD systems replace the tedious process of manual drafting, and computer-aided drawing and redrawing that can be retrieved when needed have improved drafting efficiency. A CAD system is a combination of computer hardware and software that facilitates the construction of geometric models and, in many cases, their analysis. It allows a wide variety of visual representations of those models to be displayed. Computer-Aided Manufacturing (CAM) refers to the use of computers to control, wholly or partly, manufacturing processes. In practice, the term is most often applied to computer-based developments of numerical control technology; robots and flexible manufacturing systems (FMS) are included in the broader use of CAM systems. A CAD/CAM interface is envisioned as a computerized database that can be accessed and enriched by either design or manufacturing professionals during various stages of the product development and production cycle. In CAD systems of the early 1990’s, the ability to model solid objects became widely available. The use of graphic elements such as lines and arcs and the ability to create a model by adding and subtracting solids such as cubes and cylinders are the basic principles of CAD and of simulating objects within a computer. CAD systems enable computers to simulate both taking things apart (sectioning) and putting things together for assembly. In addition to being able to construct prototypes and store images of different models, CAD systems can be used for simulating the behavior of machines, parts, and components. These abilities enable CAD to construct models that can be subjected to nondestructive testing; that is, even before engineers build a physical prototype, the CAD model can be subjected to testing, and the results can be analyzed. As another example, designers of printed circuit boards have the ability to test their circuits on a CAD system by simulating the electrical properties of components. During the 1950’s, the U.S. Air Force recognized the need for reducing the development time for special aircraft equipment. As a result, the Air Force commissioned the Massachusetts Institute of Technology to develop numerically controlled (NC) machines that were programmable. A workable demonstration of NC machines was made in 1952; this began a new era for manufacturing. As the speed of an aircraft increased, the cost of manufacturing also increased because of stricter technical requirements. This higher cost provided a stimulus for the further development of NC technology, which promised to reduce errors in design before the prototype stage. 670

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The early 1960’s saw the development of mainframe computers. Many industries valued computing technology for its speed and for its accuracy in lengthy and tedious numerical operations in design, manufacturing, and other business functional areas. Patrick Hanratty, working for General Motors Research Laboratory, saw other potential applications and developed graphics programs for use on mainframe computers. The use of graphics in software aided the development of CAD/CAM, allowing visual representations of models to be presented on computer screens and printers. The 1970’s saw an important development in computer hardware, namely the development and growth of personal computers (PCs). Personal computers became smaller as a result of the development of integrated circuits. Jack St. Clair Kilby, working for Texas Instruments, first conceived of the integrated circuit; later, Robert Noyce, working for Intel Corporation, developed an improved process for manufacturing integrated circuits on microchips. Personal computers using these microchips offered both speed and accuracy at costs much lower than those of mainframe computers. Five companies offered integrated commercial computer-aided design and computer-aided manufacturing systems by the first half of 1973. Integration meant that both design and manufacturing were contained in one system. Of these five companies—Applicon, Computervision, Gerber Scientific, Manufacturing and Consulting Services (MCS), and United Computing—four offered turnkey systems exclusively. Turnkey systems provide design, development, training, and implementation for each customer (company) based on the contractual agreement; they are meant to be used as delivered, with no need for the purchaser to make significant adjustments or perform programming. The 1980’s saw a proliferation of mini- and microcomputers with a variety of platforms (processors) with increased speed and better graphical resolution. This made the widespread development of computer-aided design and computer-aided manufacturing possible and practical. Major corporations spent large research and development budgets developing CAD/ CAM systems that would automate manual drafting and machine tool movements. Don Halliday, working for Truesports Inc., provided an early example of the benefits of CAD/CAM. He created the Made-in-America car in only four months by using CAD and project management software. In the late 1980’s, Fred Borsini, the president of Leap Technologies in Michigan, brought various products to market in record time through the use of CAD/CAM. In the early 1980’s, much of the CAD/CAM industry consisted of software companies. The cost for a relatively slow interactive system in 1980 was close to $100,000. The late 1980’s saw the demise of minicomputer671

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based systems in favor of Unix workstations and PCs based on 386 and 486 microchips produced by Intel. By the time of the International Manufacturing Technology show in September, 1992, the industry could show numerous CAD/CAM innovations including tools, CAD/CAM models to evaluate manufacturability in early design phases, and systems that allowed use of the same data for a full range of manufacturing functions. Impact of Event In 1990, CAD/CAM hardware sales by U.S. vendors reached $2.68 billion. In software alone, $1.42 billion worth of CAD/CAM products and systems was sold worldwide by U.S. vendors, according to International Data Corporation figures for 1990. CAD/CAM systems were in widespread use throughout the industrial world. Development lagged in advanced software applications, particularly in image processing, and in the communications software and hardware that tie processes together. A reevaluation of CAD/CAM systems was being driven by the industry trend toward increased functionality of computer-driven numerically controlled machines. Numerical control (NC) software enables users to graphically define the geometry of the parts in a product, develop paths that machine tools will follow, and exchange data among machines on the shop floor. In 1991, NC configuration software represented 86 percent of total CAM sales. In 1992, the market shares of the five largest companies in the CAD/CAM market were 29 percent for International Business Machines, 17 percent for Intergraph, 11 percent for Computervision, 9 percent for Hewlett-Packard, and 6 percent for Mentor Graphics. General Motors formed a joint venture with Ford and Chrysler to develop a common computer language in order to make the next generation of CAD/CAM systems easier to use. The venture was aimed particularly at problems that posed barriers to speeding up the design of new automobiles. The three car companies all had sophisticated computer systems that allowed engineers to design parts on computers and then electronically transmit specifications to tools that make parts or dies. CAD/CAM technology was expected to advance on many fronts. As of the early 1990’s, different CAD/CAM vendors had developed systems that were often incompatible with one another, making it difficult to transfer data from one system to another. Large corporations, such as the major automakers, developed their own interfaces and network capabilities to allow different systems to communicate. Major users of CAD/CAM saw consolidation in the industry through the establishment of standards as being in their interests. Resellers of CAD/CAM products also attempted to redefine their mar672

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kets. These vendors provide technical support and service to users. The sale of CAD/CAM products and systems offered substantial opportunities, since demand remained strong. Resellers worked most effectively with small and medium-sized companies, which often were neglected by the primary sellers of CAD/CAM equipment because they did not generate a large volume of business. Some projections held that by 1995 half of all CAD/CAM systems would be sold through resellers, at a cost of $10,000 or less for each system. The CAD/CAM market thus was in the process of dividing into two markets: large customers (such as aerospace firms and automobile manufacturers) that would be served by primary vendors, and small and medium-sized customers that would be serviced by resellers. CAD will find future applications in marketing, the construction industry, production planning, and large-scale projects such as shipbuilding and aerospace. Other likely CAD markets include hospitals, the apparel industry, colleges and universities, food product manufacturers, and equipment manufacturers. As the linkage between CAD and CAM is enhanced, systems will become more productive. The geometrical data from CAD will be put to greater use by CAM systems. CAD/CAM already had proved that it could make a big difference in productivity and quality. Customer orders could be changed much faster and more accurately than in the past, when a change could require a manual redrafting of a design. Computers could do automatically in minutes what once took hours manually. CAD/CAM saved time by reducing, and in some cases eliminating, human error. Many flexible manufacturing systems (FMS) had machining centers equipped with sensing probes to check the accuracy of the machining process. These self-checks can be made part of numerical control (NC) programs. With the technology of the early 1990’s, some experts estimated that CAD/CAM systems were in many cases twice as productive as the systems they replaced; in the long run, productivity is likely to improve even more, perhaps up to three times that of older systems or even higher. As costs for CAD/CAM systems concurrently fall, the investment in a system will be recovered more quickly. Some analysts estimated that by the mid-1990’s, the recovery time for an average system would be about three years. Another frontier in the development of CAD/CAM systems is expert (or knowledge-based) systems, which combine data with a human expert’s knowledge, expressed in the form of rules that the computer follows. Such a system will analyze data in a manner mimicking intelligence. For example, a 3-D model might be created from standard 2-D drawings. Expert systems will likely play a pivotal role in CAM applications. For example, an expert system could determine the best sequence of machining operations to produce a component. 673

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Continuing improvements in hardware, especially increased speed, will benefit CAD/CAM systems. Software developments, however, may produce greater benefits. Wider use of CAD/CAM systems will depend on the cost savings from improvements in hardware and software as well as on the productivity of the systems and the quality of their product. The construction, apparel, automobile, and aerospace industries have already experienced increases in productivity, quality, and profitability through the use of CAD/CAM. A case in point is Boeing, which used CAD from start to finish in the design of the 757. Bibliography Choobineh, Fred, and Suri Rajan, eds. Flexible Manufacturing Systems. Norcross, Ga.: Industrial Engineering and Management Press, Institute of Industrial Engineers, 1986. This book begins with a discussion of programmable automation technologies, including CAD/CAM, and covers planning, design, operation, and control issues involved in flexible manufacturing systems. Groover, Mikell P., and Emory W. Zimmers, Jr. CAD/CAM: ComputerAided Design and Manufacturing. Englewood Cliffs, N.J.: PrenticeHall, 1984. A textbook for CAD/CAM theory and practice; also a good source for learners of CAD/CAM. Henderson, Breck W. “CAD/CAM Systems Transform Aerospace Engineering.” Aviation Week and Space Technology 136 (January 22, 1992): 49-51. Describes use of computer-aided design and computer-aided manufacturing in the aerospace industry, where it is widely accepted. New tools have eliminated costly design steps and made product development faster and cheaper. Data generated by sophisticated CAD/CAM systems have allowed rapid prototyping and conversion of CAD data directly into solid models of complex parts in a matter of hours and for a fraction of the cost of traditional methods. Jurgen, Ronald K. Computers and Manufacturing Productivity. New York: Institute of Electrical and Electronics Engineers, 1987. Devoted exclusively to a discussion of productivity and automation. Full of illustrations, data, and issues, presented in an easy-to-read format. Machover, Carl, and Robert E. Blauth, eds. The CAD/CAM Handbook. Bedford, Mass.: Computervision Corporation, 1980. A fairly comprehensive book on CAD/CAM. Serves both general and advanced readers. Medland, A. J., and Piers Burnett. CAD/CAM in Practice. New York: John Wiley & Sons, 1986. A well-written manager’s guide to understanding and using CAD/CAM. Does not assume any knowledge of CAD/CAM on the part of the reader. Illustrations are clear and concise. 674

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Zhang, Hong-Chao. Advanced Tolerancing Techniques. New York: Wiley, 1997. Jay Nathan Cross-References Firms Begin Replacing Skilled Laborers with Automatic Tools (1960’s); AT&T and GTE Install Fiber-Optic Telephone Systems (1977); American Firms Adopt Japanese Manufacturing Techniques (1980’s); Electronic Technology Creates the Possibility of Telecommuting (1980’s); IBM Introduces Its Personal Computer (1981).

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DEFENSE CUTBACKS DEVASTATE THE U.S. AEROSPACE INDUSTRY Defense Cutbacks Devastate the U. S. Aerospace Industry

Category of event: Foundings and dissolutions Time: The 1980’s Locale: The United States The end of the Cold War and the decline of defense spending led to a decline in the U.S. aerospace industry Principal personages: George Bush (1924), the president of the United States, 19891993 Richard Cheney (1941), the secretary of defense under President Bush Ronald Reagan (1911), the president of the United States, 19811989 Richard H. Truly (1937), the administrator of NASA Caspar Weinberger (1917), the secretary of defense under President Reagan Summary of Event Early in his presidency, Ronald Reagan began an across-the-board rearmament program for the United States, with additional new spending running at $140 billion a year. His intent—more political than military— was to show the Soviet Union that it could not keep up in the economic and technological arms races. Efforts began with the deployment of cruise missiles in Europe and the expansion of numerous weapons programs at home. The expansion program reached a peak of sorts with Reagan’s 1983 speech stating his administration’s intention to pursue a Strategic Defense 676

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Initiative (SDI), popularly known as “Star Wars.’’ After that, the Soviet Union found itself unable to compete, either technologically or economically, in the Cold War. Internal pressures soon forced the Soviet Union to abandon Communism and to renounce goals of world conquest. In the United States, American politicians quickly started to speak of a “peace dividend,’’ wherein the savings from decreases in previously high levels of defense spending would be transferred to the civilian economy. Quickly, however, the “peace dividend’’ evaporated as the effects of layoffs worked their way through government contractors. A number of defense contractors found themselves in trouble and issued pink slips to thousands of highly paid, well-trained workers. The defense budget rose from $81 billion in 1970 to $296 billion in 1990, but as a share of gross national product it actually fell by almost 4 percent during that period. In comparison, the Social Security and Medicare budgets grew from $36 billion to $345 billion. Although every aspect of the defense industry felt distress, the aerospace industry suffered acutely. Not only did orders for new aircraft tail off, but entire planned programs, such as the Navy’s AX (Attack Experimental) aircraft, the modifications to Grumman’s F-14 Tomcat, the V-22 Osprey, and a number of missile, experimental, and SDI-related projects, were canceled outright, were delayed, or had funding greatly reduced. In addition, the National Aeronautics and Space Administration (NASA), another client of the aerospace firms, saw its budgets constrained. During the late 1980’s, virtually all of NASA’s budget went for the fleet of existing space shuttles and toward development of Space Station Freedom. For contractors not involved in those projects, NASA provided little employment. Competition in the aerospace companies’ civilian/commercial market also weakened their position. By the late 1980’s, the European Airbus airliner had cut deeply into sales of U.S. firms, both domestically and internationally. New planned aircraft, such as the McDonnell Douglas 80, faced delays in entering the highly competitive market. Defense cuts rather than commercial sluggishness constituted the major problem for many aerospace contractors. Ironically, the 1980’s drawdown in defense was the smallest of any in recent history. The difference in defense expenditures between the peak and the low point, as a percentage of gross domestic product, was only 2.9 percent in the post-1986 reductions, compared with 4.8 percent after the Vietnam War, 4.3 percent after the Korean War, and 35.6 percent after World War II. Moreover, the decline was more gradual. After World War II, the reductions averaged 8.9 percent annually, but the post-1986 reductions averaged only .26 percent. At the peak of World War II, annual spending on defense exceeded $885 billion 677

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(in 1993 dollars), while the post-1986 annual reductions totaled only $354 billion. Comparisons of this nature showed apparent inconsistency with the relatively serious problems many companies faced. McDonnell Douglas, for example, was one of the leading aerospace companies, producing military and commercial aircraft as well as space vehicles. The McDonnell and Douglas companies had merged in 1967 to offset swings in the defense industry with swings in the commercial aircraft industry. In the late 1980’s, as the world’s largest defense contractor, McDonnell Douglas found itself teetering on the brink of unprofitability despite a huge backlog of orders. McDonnell Douglas had orders for the F/A-18 Hornet with the Navy and the F-15 Eagle and C-17 cargo aircraft with the Air Force, in addition to helicopter, space, and missile work. Nevertheless, its corporate investment in programs such as the Advanced Tactical Fighter had proved a drain, and McDonnell Douglas had the next to worst return on assets of any major aerospace contractor, trailing only General Dynamics. Its return on equity was third worst. In 1989, the company announced a radical restructuring to deal with its worst financial quarter since the merger. McDonnell Douglas forced five thousand midlevel managers to resign their titles and compete for half that number of jobs. A year later, McDonnell Douglas laid off twenty-two thousand employees. General Dynamics (GD) was one of the few companies doing worse than McDonnell Douglas. It took a $639 million loss in 1990 and had the worst return on assets and return on equity of any of the nine major aerospace contractors. Only Grumman had a poorer bond rating. Unlike the relatively healthy Boeing Company, GD had virtually all of its work, 85 percent, in defense. In 1992, GD started to move out of aerospace by selling its fighter production program, mostly focused on production of the F-16 Fighting Falcon, to Lockheed Corporation, another industry giant. Lockheed had only about one-third the sales ($9 billion) of industry leader Boeing, but it had good earnings per share and an acceptable bond rating. It also had a recent success, production of the famous F-117 Stealth fighter, effectively used in the Gulf War of 1990. It maintained a large budget for “black,’’ or secret, programs. Despite Lockheed’s production record, it had severe problems in its Trident D-5 missile production program. That, combined with its inability to break into commercial airline manufacturing (with the exception of the L-1011), made the company vulnerable to Air Force budget cuts. Only Boeing, with its almost $30 billion in sales and its twenty-year backlog in orders, was able to postpone the effects of the defense downturn. Even Boeing, however, found itself feeling the decline in defense production. In 678

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1993, the Washington-based aircraft manufacturer joined the other companies by announcing significant planned layoffs. Impact of Event In 1990, Iraq’s invasion of Kuwait and the subsequent U.S. military action led many to think that the defense cuts might not be as harsh as expected, or might be slower than expected. The election of Bill Clinton to the presidency in 1992 brought defense policy statements during his early tenure that suggested that the cuts would be worse than expected. At the same time, NASA’s fragile budget came under fire because of the ballooning expense of Space Station Freedom, the failure to develop a reliable follow-on to the expensive space shuttles, and the performance errors of some NASA technology, such as the Hubble Space Telescope. Those events led some experts to predict another round of defense industry mergers, such as those that had occurred in the 1960’s and 1970’s. By 1990, world events had caused some policymakers to reevaluate the sensibility of drastically downsizing the Department of Defense and the “military-industrial complex.’’ The Gulf War proved, or at least greatly reinforced, the notion that the United States could build “high-tech’’ weapons that worked. That was true especially during the first six months after the war, when the claims for success of weapons such as the cruise and Patriot missiles were exaggerated by the media and the military. More significant, the threats posed by the Iraqi-launched Scud missiles on civilian populations greatly boosted the desirability of missile interception systems, which formed the basis of the Strategic Defense Initiative. Thus, one of the most expensive, “high-tech’’ sectors in the defense budget received an unexpected lift from a Middle Eastern despot with “low-tech’’ weapons. After the first round of glowing reports on the Patriot and cruise missiles, however, a revisionist analysis claimed less effective performances from the weapons than once thought. Those criticisms arrived at a time when the budget deficit was growing and legislators were searching for ways to cut government spending. After all, if the weapons did not work, why spend additional money maintaining and improving them? Subsequent studies revised the critics’ analysis, showing that most weapons performed at the highest standards ever attained in modern war. For example, American aircraft in the Gulf War flew more than twenty-nine thousand sorties with a loss of only fourteen aircraft, the lowest percentage of losses in any American war and barely half the loss rate in the Vietnam War. Another measure, the mission capability rates (the rate at which aircraft were maintained) actually exceeded the peacetime rate in eleven major lines of aircraft used in the Gulf. The comparison is blurred because typically under 679

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peacetime conditions aircraft might be held out for repair or maintenance for problems that would be repaired overnight under war conditions. Four of the aircraft attained mission capability rates of more than 95 percent. Excellent performance did not change budget realities, however, and a number of firms by the late 1980’s found themselves in the position of being out of business as a result of elimination of a single weapon. Grumman, for example, fought desperately to have the F-14 Tomcat upgraded for attack missions. Without the upgrades, Grumman would close. In the late 1980’s, the Navy leaned heavily toward the AX (Attack Experimental) aircraft, but that program was canceled in 1990 after budget overruns and poor management. Grumman hung on. General Dynamics, on the other hand, had to sell its F-16 production line after the elimination of other fighter airplanes. By 1990, most of the major airframe and propulsion contractors had concluded that the only way to survive was for them to join in consortia or “teams’’ to bid on expensive projects. That defeated the intent of the competitive bid contracts in some programs, while two or more “teams’’ competed for other contracts, as in the case of the Advanced Tactical Fighter (ATF, won by a Lockheed-led team and renamed the F-22). Other projects that saw teams either compete for the contracts or be formed in order to receive the entire contract award included the National Aero-Space Plane (General Dynamics, McDonnell Douglas, Rockwell, Rocketdyne, and Pratt & Whitney); the Light Helicopter Experimental (LHX) team of Boeing and Sikorsky, plus the engine team made up of a pairing of Allison and Garrett; and a variety of international teams, each featuring a U.S. contractor, for the new joint service trainer contract. The impetus toward sharing resources and knowledge gained ground in the late 1980’s and early 1990’s, but the evidence was far from conclusive on which investment and procurement practices were the most effective. A study by Jacques Gansler, a defense industry expert, showed that national and international cooperative efforts have taken longer and cost more than if each country had produced the weapon itself. A 1983 General Accounting Office document reported no teaming efforts that resulted in satisfied participating services and actual savings. If assessed solely on the variable of cost, teaming or joint programs generally resulted in higher costs to the taxpayer. Moreover, a spate of critics of corporate combinations produced work that showed that the most successful industries were the most highly competitive and the least reliant on government support, two traits that characterized few aircraft manufacturers by 1990. Supporters of the consortia concept argued that the United States had fallen behind Europe with its Airbus airliner, funded in 1969 at a meeting in which Germany and France, as well as the Hawker-Siddeley company, 680

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agreed to unite to keep the market from the American aircraft manufacturers. The success of Airbus remains a matter of debate. It captured more than 20 percent of the world market, for the first time taking Boeing’s share of the world market below 60 percent. Airbus, however, devoured more than $7 billion in taxpayers’ money, and Europe did not create a single net new job from 1970 to 1981, the time during which the Airbus was being built in Europe to keep jobs from going overseas. Other forces certainly were at work regarding employment, but the evidence on Airbus was not unequivocal. Naturally, American aircraft manufacturers clamored for assistance from the U.S. government based on their perception that the Europeans gave their companies an unfair advantage. The final, most obvious impact of the decline of the American aerospace industry came in the human terms of unemployment. White collar workers, engineers, and high-tech workers all faced unprecedented levels of layoffs, especially in California, where the economy started to stagnate for the first time in the post-World War II period. Defense cutbacks came at a time when Los Angeles had just become the nation’s leading manufacturing center as well as one of the top high-tech regions in the United States. The effects on the California economy were felt in the real estate market, where growth in prices slowed to 5 percent per year—virtual stagnation in California terms. In some areas, housing prices fell, and homes stayed on the market far longer than in the past. Outmigration of companies started in earnest in the early 1990’s. Neighboring states such as Arizona and Nevada, seeing their opportunity to attract defense giants, offered special tax breaks or other incentives to relocate. Lockheed relocated some of its factories to Georgia in response to an attractive deal offered by that state’s government. Smaller defense companies left the Golden State in droves. How far the defense decline would go, and its ultimate effects on the aerospace industry, remained unknown by 1993. Les Aspin, Clinton’s secretary of defense, made it clear that he supported still deeper cuts in the defense budget. At the same time, an international economic slowdown had caused many nations to cancel their purchases of American commercial aircraft, exacerbating the troubles from the defense side of the economy. Bibliography Gansler, Jacques. Affording Defense. Cambridge, Mass.: MIT Press, 1989. A follow-up to his The Defense Industry (1980). Ganlser details the problems and pitfalls of weapons procurement in an age in which legislators were determined that contractors would not get away with “fraud and abuse.’’ In reality, as Gansler shows, the system was pregnant with barriers to efficiency that only served to drive up costs. Rules that 681

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required competition in all lines of weapons often caused two or more unhealthy companies to limp along, growing increasingly dependent on the military. Hallion, Richard P. Storm over Iraq: Air Power and the Gulf War. Washington, D.C.: Smithsonian Institution Press, 1992. More than a history of the Gulf War. Hallion provides a synopsis of air power theory, a review of trends in procurement and production, a superior technical appraisal of tactics and technologies, and an overall thorough assessment of the role of aircraft in modern warfare. Morrocco, John D. “Defense Conversion Panel Urges Dramatic Changes.” Aviation Week and Space Technology 138 (January 25, 1993): 64-65. Provides a critical comparison of defense drawdowns, those following World War II, the Korean War, and the Vietnam War and that of the 1980’s. Invaluable statistics include spending relative to gross domestic product, average change per year, and difference between high points and low points. Puth, Robert C. American Economic History. 3d ed. New York: Dryden Press, 1993. A general survey useful for trends in government, defense, and civilian budgets in the 1980’s, as well as a review of employment and investment statistics relevant to the defense industry. Weinberger, Caspar. Fighting for Peace: Seven Critical Years in the Pentagon. New York: Warner Books, 1990. Contains a detailed insider’s discussion of the buildup during the Reagan years. Larry Schweikart Cross-References Roosevelt Signs the Emergency Price Control Act (1942); Roosevelt Signs the G.I. Bill (1944); The U.S. Service Economy Emerges (1960’s); The United States Plans to Cut Dependence on Foreign Oil (1974).

682

ELECTRONIC TECHNOLOGY CREATES THE POSSIBILITY OF TELECOMMUTING Electronic Technology Creates the Possibility of Telecommuting

Categories of event: Labor and business practices Time: The 1980’s Locale: The United States and other industrial nations Developments in electronic office equipment installed in people’s homes enabled business employees to work at home as telecommuters Principal personages: Alvin Toffler (1928), a futurist who predicted the rise of telecommuting Thomas W. Miller, the director of the National Work at Home Survey Patricia Lyon Mokhtarian, a researcher who chronicled advances in telecommuting Jack M. Nilles, a consultant to the California Telecommuting Pilot Project in the late 1980’s Summary of Event In the early 1980’s, key improvements were made in both the power and the affordability of electronic office equipment. These developments enabled many business employees to work all or part of the week at their places of residence. The personal computer was the centerpiece of the modern gadgetry. With a modem, a printer, a fax machine, a telephone with special features, and, a few years later, a small copy machine, a home-based white-collar worker could put together a “virtual office” with links to the 683

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company office to enable transfer of information in either direction. The term “telecommuters” was adopted for home-based workers connected to their employers by electronic equipment. The pioneers of such work practices were a few isolated individuals with unusual levels of specialized technological expertise who set up arrangements of their own design. In the early 1980’s, the technology became accessible to large numbers of typical businesspeople. By 1984, about two hundred companies had made some experiments with telecommuting, and about thirty Telecommuting has made possible a revolution in had set up programs. lifestyles for many workers. (PhotoDisc) Companies with employees working at home were initially concerned about productivity. Soon, however, some insurance companies, such as Blue Cross and Blue Shield of South Carolina, were able to report improvements in output when workers stayed at home. Employees were initially interested in flexibility in the ways of combining work and home obligations. Many other advantages of telecommuting were gradually recognized, and futurists surmised that the way work is done in society could be transformed. Some projected that by the middle of the 1990’s, there could be twenty million telecommuters. Technical developments in home-installed electronic equipment connected to equipment at the corporate office offered new possibilities in the flexibility of working arrangements. The developments included portable telephones and other devices that allowed workers to contact employers when on the road, held up in traffic, or on commuter trains. By the early 1990’s, fax machines that could be used in cars were on the market. In most cases, the equipment for telecommuters was provided by employers. There were some individuals, however, whose enthusiasm to set up home-working arrangements led them to buy their own equipment. With a personal computer at home, a worker can produce letters, reports, 684

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budgets, sales projections, forecasts, and other documents in exactly the same way as in the corporate office. Necessary data could come via modem, and finished documents could go back the same way. The machine at home, together with its software, needed to be compatible with that at the office. For some years, there were problems of information exchange between Apple and International Business Machines (IBM) systems and between personal computers and mainframes. Translatability and conversion features were built into the systems as manufacturers recognized that users were increasingly linking machines. When a modem is used in conjunction with a computer, access to data stored elsewhere becomes possible, and a conduit for communication is established. This makes available a whole range of information and business support services, including electronic mail service. These capacities reduce the isolation that would otherwise be the condition of workers at home. Worker mobility increased with the advent of laptop computers. These small machines are powered by rechargeable batteries. They are light enough to be carried around, but many were nearly as powerful as some personal computers by the early 1990’s. Improvements in computer printer technology also benefited telecommuters. Many printer manufacturers offered several versions of their products, intended for various levels of use and different levels of quality. Printers for home use need not be different from those attached to computers in offices, but cost savings could be realized by using a printer designed for less strenuous or exacting work. The facsimile machine established itself as an indispensable piece of office equipment. The word “fax” became part of the English language, as both a noun and a verb. A fax machine sends a copy of a document to another machine, using telephone lines. Falling costs and increasing use of the machines made them affordable for home offices and allowed workers to reach a large proportion of the business world without leaving home. Developments in telephone technology are often mentioned in the context of telecommuting. A worker dealing with routine claims processing for an insurance company, for example, may need nothing more than basic telephone service. Others may need a line separate from their personal telephone, together with a message system or voice mail. Still others may need cellular telephones, which can be taken on the road. Cellular telephones made long commutes more productive and allowed offices to keep in touch with traveling employees. People who switched to working at home could get some benefits from advanced technology even without purchasing equipment. For documents 685

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not suitable for fax or modem delivery, and for people without these devices, improved services of the United States Postal Service, United Parcel Service, and Federal Express were available. Businesses, particularly copy shops, began offering fax service to customers. For a time, the major weakness in the telecommuter office was the lack of a copier. Home-based workers in the 1980’s regularly used the services of local copy centers as a useful supplement to the home office. This was expensive in terms of time, if not in charges for copies. Copy machines were large, heavy, and expensive, and so not suitable for use in the home. Responding to the needs of home-based workers, manufacturers began producing inexpensive desk-top copiers. With this addition, home offices took on the characteristics of corporate offices. Impact of Event Telecommuting has had effects on individuals who work at home, their employers, and society as a whole. Telecommuters spend less time, or no time, traveling to and from work. This reduces both the unproductive use of time and expenditures for gasoline and vehicle maintenance. Telecommuters also enjoy flexibility in organizing their work, being less constrained by office hours. In the case of parents, the chance to work at home permits combining paid work and child-care responsibilities. Many parents found it possible to look after children while putting in a normal day’s work. In some cases, parents from different families shared child-minding duties while maintaining, among themselves, the required attention to computer terminals. Parents who decide to stay home to provide childcare can ease their transition back to the office by finding employment as telecommuters or in other home-based work. Telecommuting offers a solution to the conflicting pressures of work and family. Telecommuting also enables a gradual return to work for convalescents not yet ready for five-day-a-week rigor. Persons rendered immobile through an injury such as a broken hip or a permanent disability can be productive even though unable to travel to work. Telecommuting thus offered new possibilities for disadvantaged workers. The disadvantages of telecommuting primarily flow from the isolation of being at home. Many employees who have known the ways of the office become acutely aware of what they are missing when they stay at home: the informal communication and social interaction of the office. Some worry that their reduced visibility will limit their promotion prospects. The value of face-to-face contact as part of the communication that supports work activities is missed when working at home. These concerns are mitigated when the employee goes to the office for part of the working week. 686

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Motivation can be affected in either direction by telecommuting. Those who need the stimulation of rapport with others will be less motivated at home. Others may enjoy the feeling of enhanced competence when they discover that they can find a way to meet a challenge without recourse to the help of the worker at the next desk. Although human oversight is diminished, home- based workers can still be given production goals. Some computer software allows monitoring of the amount of work performed. The situation for disabled workers is delicate and complex. Special efforst to use new home-based technology to bring house-bound people into the workforce can either liberate them from the feeling of being unproductive or reinforce their sense of isolation. Companies may decide that it is less expensive to keep a worker at home than to redesign the office to meet his or her needs. Regarding the impact on companies, a primary concern is the productivity of employees working at home. Without acceptable productivity, no company is likely to permit telecommuting. The verdict from diverse companies is that responsible and mature employees generally show an increase in productivity when working from home. Companies that had instituted telecommuting programs by the 1990’s included those in banking, insurance, publishing, business services, computers, catalog retailing, and stock brokerage. All found that telecommuting had the potential to increase productivity. There are legitimate concerns regarding whether a person working at home will be distracted by various elements of the home environment and thus deflected from work. The office itself has distractions, however, and many workers find it easier to concentrate and keep on task at home. AlThe development of increasingly powerful and though not everyone may be compact laptop computers during the 1980’s and temperamentally suited to 1990’s further expanded the freedom of telecomworking at home, many peo- muters to work wherever they please. (PhotoDisc) 687

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ple are more productive. The company office can maintain links and can telephone or fax a telecommuter to keep a check. At the other extreme, some people increase the length of their workday because there is no longer a point in the day when they leave the work environment. Their work is in their homes and may be difficult to ignore. Aside from gains in worker productivity, companies benefit through economies in office space, parking, and other overhead expenses. More subtle effects include enhancement of communicative skills of managers, since more precision is needed to convey instructions to people who are not physically present; development of different methods of project management to allow workers who do not physically meet to bring parts of a project together; and development of judicious schemes of goals and rewards for people working outside the office. All these gains can translate into better use of traditional, office-based employees. Some companies with telecommuting employees are faced with problems of monitoring and security. In most cases, the requirement that work be done to specification and by a certain deadline are the only control criteria necessary. In some cases, a business might be worried about home employees using company equipment for freelance work or about the use of proprietary information by employees who could undertake work for competitor companies or sell information. The impact of telecommuting on society as a whole is potentially enormous, as it reduces the distinctions between work and home. Tax law has had to adapt to workers who are neither office-based nor self-employed, or who work part of each week at an office outside the home. At the local level, laws that restrict use of the home for commercial purposes were challenged. Another consideration for society is the matter of pollution and fuel consumption resulting from the familiar types of commuting. As travel becomes more expensive, inconvenient, and time-consuming, the benefits of telecommuting increase. Telecommuting reduces the burdens on those forced to travel and on society in general by reducing traffic congestion and pollution. Regarding questions of distributive economics, the impact of telecommuting may well include both bad and good. Organized labor has warned of the increasing use of employees who, because they are dispersed, are unlikely to become part of a collective unit that protects their interests. Labor unions warn of home-based sweatshop labor. On the positive side, there is evidence that in Great Britain, home-based workers’ pay is better than average. It is conceivable that the hiring of home-based people in low-income neighborhoods by companies in the suburbs could be encour688

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aged as a public policy for reducing geographic disparities in income. The technology that supports telecommuting has both liberating and isolating tendencies. Its long-term impact will depend on how business and workers choose to act on the possibilities that the technology creates. Bibliography Arden, Lynie. The Work-at-Home Sourcebook. 4th ed. Boulder, Colo.: Live Oak, 1992. Gives practical information about many aspects of telecommuting and other home-based work. Indicates the kinds of work that lend themselves to home work and includes directories of companies that have telecommuting programs. Helpful for anyone searching for a telecommuting job or other home-based employment. Bernardino, Adriana. Telecommuting: Modeling the Employer’s and the Employee’s Decision-Making Process. New York: Garland, 1996. Best, Fred. “Technology and the Changing World of Work.” The Futurist 18 (April, 1984): 61-66. Deals with the many issues associated with working at home, including skill requirements, displacement of workers, and management of decentralized systems. Includes speculation about a future home-based economy. Hamilton, Carol-Ann. “Telecommuting.” Personnel Journal 66 (April, 1987): 90-111. A guide for setting up telecommuting programs in a company. Recognizes various factors affecting employees, including security, employee benefits, career development, equipment, and insurance. Useful for companies considering a telecommuting program. Kanarek, Lisa. Organizing Your Home Office for Success: Expert Strategies That Can Work for You. New York: Penguin, 1992. A practical guide to organizing the office at home. Includes material on choosing the location for the office, filing systems, planning, time management, handling information, and choosing printers. Contains useful lists of suppliers of equipment. Kinsman, Francis. The Telecommuters. New York: John Wiley & Sons, 1987. A study of telecommuting in Great Britain. Describes specific company schemes in detail and reports high productivity and good earnings among telecommuters. Interesting and futuristic. Wolfgram, Tammara H. “Working at Home: The Growth of Cottage Industry.” The Futurist 18 (June, 1984): 31-34. Offers a perspective about the future of work. The trend toward work at home is noted. States that some issues need to be faced, including the changing of laws that restrict home-based work. Richard Barrett

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Cross-References Nixon Signs the Occupational Safety and Health Act (1970); AT&T and GTE Install Fiber-Optic Telephone Systems (1977); IBM Introduces Its Personal Computer (1981); A Home Shopping Service Is Offered on Cable Television (1985); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999).

690

CONGRESS DEREGULATES BANKS AND SAVINGS AND LOANS Congress Deregulates Banks and Savings and Loans

Category of event: Finance Time: 1980-1982 Locale: Washington, D.C. Deregulation in the banking and thrift industries redefined the roles of financial institutions and encouraged intense competition in financial markets Principal personages: Paul A. Volcker (1927), the chairman of the Federal Reserve Board, 1979-1987 Jake Garn (1932), a senator from Utah, chairman of the Senate Banking Committee from 1975 to 1984 Fernand St. Germain (1928), a congressman from Rhode Island, chairman of the House Banking Committee from 1980 to 1988 Jimmy Carter (1924), the president of the United States, 19771981 Ronald Reagan (1911), the president of the United States, 19811989 Summary of Event Early in the 1980’s, the United States Congress passed two pieces of legislation that represented the most significant movement toward depository institution reform since the 1930’s. The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and the Depository Institutions Act of 1982 (Garn-St. Germain Act) signaled the resolve of two presidential administrations to create a financial marketplace that 691

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would be more adaptable to changing economic conditions. The U.S. government traditionally has held that regulation of the banking and thrift industries is vital to the safety and stability of the economy. Thus, when the banking system nearly collapsed in the 1930’s, a number of regulations were introduced that restructured the industry. These regulations met most of their objectives for several decades because the system operated well in the prevailing environment of relatively stable prices and interest rates. The status quo was overturned, however, by two disruptive forces. First, in the 1960’s, the United States attempted to simultaneously fight both domestic poverty and a war in Southeast Asia. The economy expanded tremendously, and demand for credit increased. Eventually, unprecedented high interest rates and inflation resulted. Second, in the 1970’s development of computer and communications technology created an ability to establish accounting and fund transfer systems that early bankers would have envied. These systems were easily accessible to nondepository institutions wishing to offer products and services comparable to those offered by banks and savings and loans. In some respects, nonbanks had a competitive edge because they were not regulated as heavily. By the late 1970’s, some regulations were seen as being detrimental to the financial industry’s health. At this time, both banks and thrifts were restricted in the interest they could pay to depositors by Regulation Q of the Federal Reserve Act. Whenever market interest rates rose higher than Regulation Q ceilings, depositors removed funds from banks and thrifts. Money market mutual funds were highly successful in drawing funds away from banks and thrifts simply because they could offer higher returns. This draining of funds, called disintermediation, restricted the lending activities of banks and thrifts. Savings and loans had an especially difficult time in this environment of high interest rates because of their financial structures. The bulk of their assets consisted of long-term fixed-rate mortgages at interest rates below the market rates of the time. On the other hand, most liabilities were in the form of deposits that could be withdrawn almost immediately. Any increases in interest rates that the Federal Reserve Board allowed under Regulation Q immediately affected the institutions’ interest expenses, or the cost of funds. Consequently, as rates rose in response to competition, profit margins narrowed. Institutions that did not increase the rates paid to depositors, by choice or because of regulation, found their sources of funds drying up and therefore were unable to make new loans to take advantage of higher interest rates. During the late 1970’s, the banking industry experienced another chal692

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lenge. Many banks that were members of the Federal Reserve System (the Fed) gave up their memberships. Members were required to hold reserves (a fraction of deposits, meant to ensure that banks could meet depositors’ withdrawals) in noninterest-bearing accounts at the Fed. Nonmembers also were required to maintain reserves, but their reserves could be held at correspondent banks, where they could be traded for “free services.” As interest rates increased, the free services offered also increased and member fallout from the Fed increased critically. Early in 1980, bankers lobbied for decontrol of interest rates on deposits and elimination of restrictions imposed on loan rates by state usury laws. Paul A. Volcker, chairman of the Federal Reserve Board, emphasized the seriousness of the Fed membership problem and warned of a crisis if action was not taken quickly. The Senate and House banking committees began holding joint meetings in March, 1980. Near the end of March, a compromise reform bill was presented to Congress and passed quickly. The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) was signed into law by President Jimmy Carter on March 31, 1980. The primary objective of DIDMCA was to create a more competitive environment for the depository institutions. The secondary objective was to improve the Fed’s power to control the money supply. In the most important provision, Regulation Q was phased out over a six-year period. Savings and loans were granted expanding lending powers, primarily the capability to invest in consumer loans. State usury laws were overridden for all federally insured lenders. Interest-bearing checking accounts were authorized for all depository institutions. Mutual savings and loans were allowed to convert more easily to a stock structure. In addition, deposit insurance coverage was raised to $100,000 per account. The Fed membership problem also was addressed in an attempt to promote the Fed’s control of the money supply. All depository institutions would be required to meed the same reserve requirements. Moreover, they could meet those requirements only by holding their reserves in the vaults or at the Fed. This removed the advantage nonmembers previously enjoyed. At the same time, the Fed was required to offer its services to nonmembers. These provisions reversed the tide of Fed membership losses. The objective of creating a more competitive environment was only partially met. The problem was that market rates were so high that competition with nondepository institutions was an unprofitable undertaking. For the thrifts in particular, it became increasingly difficult to avoid losses. By the end of 1980, about 36 percent of the thrift industry was losing money, despite DIDMCA. In 1981, that proportion rose to 80 percent. In 1981 and 1982, various bills were introduced in Congress to assist the 693

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thrifts with their problem. After months of compromising, new legislation was signed by President Ronald Reagan on October 15, 1982. Its official title was the Depository Institutions Act of 1982; it has become popularly known as the Garn-St. Germain Act after its sponsors, Senator Jake Garn and Congressman Fernand St. Germain. The Garn-St. Germain Act sought to rescue and support the thrifts and to reform the basic function of the industry. Among the major provisions of the act was authorization of money market deposit accounts for banks and thrifts. Savings and loans were granted expanded powers. They were authorized to make commercial loans, more nonresidential real estate loans, and more consumer loans. The act also made it easier for troubled thrifts to be acquired. The Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Deposit Insurance Corporation (FDIC) were authorized to purchase “net worth certificates” from floundering thrifts or banks to keep them from failing. The act also overrode state restrictions on due-on-sale clauses, allowing lenders to adjust the rate on mortgage loans that were assumed by property buyers. Impact of Event The larger, more aggressive thrifts welcomed DIDMCA. They saw potential profit in the ability to include shorter term consumer loans in their portfolios. Disintermediation was their biggest threat, so the demise of Regulation Q was welcomed. Not all smaller banks and thrifts were happy with DIDMCA. Many were not anxious to compete for high-cost funds and then enter into unfamiliar loan arrangements. There was another group of DIDMCA “losers”—banks that were not members of the Federal Reserve System. They were forced to place reserves into noninterest-bearing accounts. In return, they received the authority to purchase services from the Fed. They saw this as a poor trade. In the first year after passage of DIDMCA, interest rates remained extremely high. This was a poor environment for institutions to test their new competitive powers. Consequently, the problems of disintermediation and thrift losses did not improve. Even the more extensive lending powers provided by the Garn-St. Germain Act did not have an immediate effect. One tool that did have an impact fairly quickly was the provision allowing money market depository accounts (MMDAs). Money market mutual funds had amassed more than $230 billion in accounts by 1982, mainly at the expense of banks and thrifts. At the end of 1982, depository institutions began attracting many of these funds back through MMDAs. By the end of 1983, MMDAs represented about 16 percent of the total deposits at banks and thrifts. Total deposits in MMDAs overtook deposits in money market mutual fund accounts. 694

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There was a negative side to this “success.” The legacy of deregulation will be that it created an era of expensive funds at depository institutions. Deregulation made it possible for banks and thrifts to compete, but shrinkage of margins between lending and borrowing rates made institutions vulnerable to failure. In the years following Garn-St. Germain, the number of bank and thrift failures was unprecedented. From 1983 to 1986, unrelated to deregulation, inflation subsided and interest rates fell. The business climate improved, and the real estate market boomed. Thrifts made extensive use of their new power to make nonresidential loans. This prosperity turned around in just a few years. By the late 1980’s, problems in the oil industry and an overbuilt real estate market led the economy downward. The FSLIC could not handle the drain on its resources caused by numerous failures of thrifts. In response, Congress enacted the Financial Institutions Rescue, Recovery, and Enforcement Act (FIRREA) in August, 1989. In some respects, FIRREA was the counterpoint to Garn-St. Germain. FIRREA put the clamps back on the thrift industry. It provided funds to support the industry, but it also imposed provisions to return the industry to its residential mortgage roots. There are several implications to be drawn from events since deregulation. First, individual institutions have made changes in their functions and in the products and services they offer. Different types of institutions are becoming more alike; there is a blurring of function among the various depository institutions. Second, greater competition has meant more competitive pricing and shrinking profit margins. Few banks and thrifts can afford to offer free or underpriced services as benefits to customers. This is likely to be a permanent feature of the industry. Third, shrinking profit margins have resulted and likely will continue to result in bank and thrift failures. This trend appears to be leading to an industry of fewer, but larger, institutions. Fourth, the increased incidence of failure has led to further government intervention. This re-regulation is apparent in some of the provisions of FIRREA. Fifth, deregulation led some government analysts to the conclusion that there was regulatory overlap in the system. The FDIC absorbed the FSLIC through FIRREA. More such consolidations are probable. One of the implications of deregulation for consumers is that they can expect to find market rates offered on financial services. Borrowers will pay market rates to obtain funds and may be asked to absorb more of the risk of changes in interest rates through variable-rate loan arrangements. Borrowers who had locked in low rates benefited tremendously in the 1970’s and early 1980’s. Depositors will seek market rates on the funds they invest in banks and thrifts. Consumers have become more sophisticated about the 695

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financial markets and will continue to show interest rate sensitivity in making deposit choices. In addition, consumers will be given more options through increased competition. Deregulation has brought about a proliferation of alternative financial services. Consumers should be able to tailor financial services to their needs. Not all the implications of deregulation are positive. It is clear, however, that the impact of deregulation has been extensive and long-lasting. The structure of the financial markets has been changed profoundly. The roles of the banks and thrifts and the manner in which they conduct business have been revolutionized. Bibliography Bowden, Elbert V., and Judith L. Holbert. Revolution in Banking. 2d ed. Reston, Va.: Reston, 1984. Provides detailed analysis of changes occurring in the financial services industry during the early 1980’s and an outlook for the system from that era’s point of view. Represents an early attempt at putting deregulation of depository institutions into perspective. Includes numerous suggested readings on the topic. Cargill, Thomas F., and Gillian G. Garcia. Financial Deregulation and Monetary Control. Stanford, Calif.: Hoover Institution Press, 1982. Presents the DIDMCA from a historical perspective. Written prior to completion of the deregulation process; presents an interesting foretelling of events yet to come. Emphasizes the impact of DIDMCA on the financial system, with an excellent review of the implications for governmental monetary policy. Cooper, Kerry, and Donald R. Fraser. Banking Deregulation and the New Competition in Financial Services. Cambridge, Mass.: Ballinger, 1986. Extensive academic review of the literature concerning the revolution in financial services. Reviews and analyzes financial change; assesses the forces and events that forged the new structure. Describes the nature of changes as they existed and offers insights into possible future directions of the industry. Dickens, Ross N. Contestable Markets Theory, Competition, and the United States Commercial Banking Industry. New York: Garland, 1996. Lash, Nicholas A. Banking Laws and Regulations: An Economic Perspective. Englewood Cliffs, N.J.: Prentice-Hall, 1987. A comprehensive but nontechnical review of the major laws and regulations influencing the banking/thrift systems. Completely describes the evolution and demise of Regulation Q. Clearly states the major provisions of both DIDMCA and Garn-St. Germain. Roussakis, Emmanuel N. Commercial Banking in an Era of Deregulation. 696

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New York: Praeger, 1989. Examines commercial banking in the framework of the entire U.S. financial services industry. Emphasizes the changes experienced by the industry at large, stressing the transformation of roles of various depository institutions. Examines the forces that shaped new trends in the financial markets. Places greatest emphasis on the management challenges of the new competition. Victor J. LaPorte, Jr. Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); The Banking Act of 1933 Reorganizes the American Banking System (1933); The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); The Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy (1964); Bush Responds to the Savings and Loan Crisis (1989).

697

THE CABLE NEWS NETWORK DEBUTS The Cable New s Network Debuts

Category of event: New products Time: June 1, 1980 Locale: Atlanta, Georgia CNN altered the customary format of television programming by introducing a twenty-four-hour daily schedule of in-depth newscasting and live transmission to a global audience Principal personages: Robert Edward “Ted” Turner III (1938), the founder of the Turner Broadcasting System, the parent company of CNN Kirk Kerkorian (1917), a motion picture entrepreneur Wyatt Thomas “Tom” Johnson, Jr. (1941), the third president of CNN, beginning in 1990 Summary of Event The advent of the Cable News Network (CNN) changed the nature of television production and news programming. The innovative quality of CNN’s programming arose from the application of satellite technology to news production and distribution across national frontiers. CNN revolutionized the strategy and structure of mass communication with the inception of around-the-clock transmission of news to a global audience. CNN’s global scope and live coverage of the news brought visual instancy to international events and reconfigured the contextual perception of international relations. The history of CNN is inseparable from the entrepreneurial genius of Robert Edward “Ted” Turner III, the builder of the organization. Turner broke into the leadership ranks of the competitive mass communication industry, and CNN owes its success to his objective definitions and uncom698

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promising self-confidence. The history of CNN is an account of the entrepreneurial restlessness of its founder and the eventual transformation of a fledgling family venture into a transnational corporate outfit. After the death of his father, Turner inherited the Turner Advertising Company, which specialized in billboards. Turner, through some ingenious reordering of rights and liabilities, extricated the billboard enterprise, conservatively valued at more than $1 million, from contractual problems, thus retaining control of it. He proceeded to expand the company through the acquisition of other billboard companies. Turner’s interest in mass communication went beyond outdoor advertising. By 1969, he was ready to diversify his holdings, which included a number of radio stations he had acquired as part of a strategic marketing approach. He had placed the billboard firm in stable and profitable order and seemed resolved to apply his skills and profits to a higher level of enterprise. He entered into negotiations with Rice Broadcasting, the proprietors of WTSG-Channel 17, a small ultrahigh frequency (UHF) television broadcaster based in Atlanta, Georgia. Turner bought Channel 17 for $3 million. Its weak transmission signal and a number of regulatory constraints contributed to $689,000 in operational losses in Turner’s first year of ownership. Despite a string of losses in the new venture, Turner did not slip into bankruptcy. He had successfully transformed the billboard company from a familybased unit into the organizational basis of a public company, the Turner Broadcasting System. That company remained profitable and churned out financial support for Turner’s television efforts, which included a subsequent acquisition in North Carolina, Charlotte’s Channel 36. By 1973, Turner had combined business strategy, hard work, and a dash of luck to push up his Atlanta station’s ratings. Channel 17, now called WTBS, began running comedies, wrestling, sports, and films. Turner’s billboards adver- Ted Turner, founder of CNN. (George Bennett) 699

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tised the station and proudly publicized upcoming broadcasts of Atlanta Braves baseball games on Channel 17. Wrestling was well received and boosted Channel 17’s share of the viewing audience. The viewership further expanded after Turner secured a five-year right, for $2.5 million, to screen Atlanta Braves baseball games. Channel 17 also took over from the local WSB-TV, then an affiliate of the National Broadcasting Company (NBC), the carriage of some NBC network programs. The expansion in programming increased the audience and visibility of Channel 17. The mid-1970’s saw pivotal changes for Turner Broadcasting. The deregulation of cable access by the Federal Communications Commission enabled private broadcasters such as WTBS and John Kluge’s Metromedia to explore opportunities in satellite technology. Turner Broadcasting, following in the steps of Home Box Office (HBO), took advantage of a satellite facility, SAT COM I, previously considered for telephonic application by the Radio Corporation of America, to transmit signals to Earth receivers. In 1976, Turner’s WTBS Channel 17, using a national cable format, transmitted to receivers in almost every state. WTBS signals went via satellite to cable receivers nationwide. The unorthodox venture into national cable networking proved successful and potentially expandable. At the same time, Turner further diversified his holdings to expand the input sources for WTBS programming. The expansion in program sources was necessary to sustain a twenty-four-hour daily output. Turner bought the Atlanta Braves baseball and Atlanta Hawks basketball teams in 1976 and acquired rights to show Atlanta Flames hockey games on the WTBS network. WTBS aired a variety of news and entertainment shows but gave precedence to the latter. News broadcasting, however, would turn out to be the structural hinge and competitive strategy of the company in the 1980’s and beyond. On June 1, 1980, four years after inaugurating its national cable programming, the Turner Broadcasting System launched the Cable News Network (CNN), the first around-the-clock cable news service. Its initial audience consisted of 1.7 million U.S. homes. That year, CNN recorded $7 million in revenue and $16 million in operating losses. Even after five consecutive years of losses, Turner did not abandon his vision. The founder of CNN had major plans to extend the day-long format of broadcasting in a new direction. At midnight on December 1, 1981, he launched CNN2, which offered a condensed edition of the news in thirty-minute slots and updates. CNN2 was renamed CNN Headline News in August, 1983, having absorbed its only competitor, the Satellite News Channel. The 1980’s, a decade of consolidation and expansion at CNN, took the network on a 700

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prodigious path of innovative growth, with profound effects on global news production, distribution, and consumption. Impact of Event The founding of CNN brought innovation to the structure and strategy of competition in the mass communication industry, particularly in cable programming. CNN’s daily offerings around the clock revolutionized the scope and content of news production. Television viewers with cable access no longer had to wait for prime-time broadcasts for news delivery. The network’s live coverage and in-depth analysis of events introduced a new dimension to news distribution and consumption, offering free and instant flow of information across national boundaries by satellite. Turner’s internationalist outlook underscored the orientation and performance of CNN. CNN won the right in April, 1982, to be on a footing with the major network organizations in White House press pooling. It initiated the first live television broadcast since 1958 from Cuba to the United States. The “International Hour,” a world-events documentary covering events in more than a hundred nations, debuted on CNN in March, 1984. In April, CNN received the George Foster Peabody Broadcasting Award, the first of many awards for program quality and excellence. In September, 1985, CNN International was launched as a twenty-four-hour global news service. Its signal initially went to Europe, then by 1989 to Africa, Asia, and the Middle East via Soviet satellite. By 1993 it served more than thirty million subscribers worldwide. CNN’s rapid development finally paid off in profits. Five years of operating losses, partly the result of reinvested returns, ended in 1985, which saw $123 million in total revenue and $13 million in profit. The turnaround was remarkable, given an operating loss of $20 million for the preceding year. By 1985, the network had unquestionably established a respectable presence in a cutthroat media market. CNN offered a national audience a live glimpse of the Challenger space shuttle explosion in 1986. The network’s camera was present in North Africa for instantaneous coverage of U.S. aerial bombardment of Libya in April, 1986. CNN received the Overseas Press Club Award for that coverage. The Turner Broadcasting System acquired a vast film library in 1986 through a deal with Kirk Kerkorian. CNN’s approach to news marketing and consumption was path-breaking. Aside from enhancing the political consciousness of the public by broadcasting world events, CNN positioned viewers in a make-believe situation of participant-observer. Viewers watched live events unfolding across the globe. For example, for two months in 1987, the public watched the IranContra investigation in Congress. Two years later, the world watched as 701

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students and activists confronted government forces in China. Beginning in 1987, the CNN World Report collected and collated, without censorship, news reports from different parts of the world. In May, 1988, Noticiero Telemundo-CNN was launched as a Spanish-language news service for viewers in the United States and Latin America. The increasing sophistication and coverage of the network were obvious. In 1988, CNN received a second George Foster Peabody Broadcasting Award for its analytical focus on the 1987 stock market plunge. In 1991, CNN and CNN Headline News together claimed 34.5 percent of the national news audience, by households, compared with 23.8 percent for the American Broadcasting Company (ABC), 21.0 percent for the Columbia Broadcasting System (CBS), and 20.0 percent for the National Broadcasting Company (NBC). In 1992, CNN telecasts reached almost sixty million American homes and about thirty million foreign households in 130 nations. By January, 1992, a daily average of 190,000 viewers watched CNN’s editorial briefs on Headline News. The string of awards conferred on CNN since 1984 reflects the quantitative and qualitative content of the medium’s output as well as the industry’s recognition of the network’s distinctive influence on mass communication. The recognitions accorded to CNN include the Golden Cable ACE, DuPont Silver Baton, Clarion, Silver Gavel, National Headliner, Edward R. Murrow, and the New York International Television and Film Festival awards. In 1991, Time magazine recognized CNN’s founder, Ted Turner, as its “Man of the Year.” An ACE award in 1992 recognized CNN’s distinctive live coverage of the Persian Gulf War. By 1992, the network had accumulated five George Foster Peabody Broadcasting Awards. Critics of television programming and production have suggested that the effectiveness and popularity of CNN arise from the network’s capacity to move far beyond the parochial limits of soap operas and situation comedies into the more realistic realms of humanity and social conditions. Supporters point to Turner’s sponsorship of the Goodwill Games in Moscow as well as the commitment of the Turner Broadcasting System to the causes of global peace, conservation, nuclear order, public education, and impartial reporting. The Turner Broadcasting System and its subsidiaries responded to a variety of interests. At selected airport terminals and supermarkets, travelers and shoppers could watch the Airport and Checkout channels aired by the Turner Private Networks. For the business community, CNN provided Business Day, Business Morning, Moneyline, and Your Money. CNN International aired Business Asia, Business News, and World Business Today. Sports fans got daily reports. Newsroom served as a classroom teaching aid. 702

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CNN Radio offered both network and closed circuit services to domestic and international radio listeners. CNN’s Larry King Live provided a serious yet casual talk show, and Special Report offered investigative journalism. Ted Turner demonstrated the relevance of satellite technology to mass communication. He successfully combined broadcast and nonbroadcast services for domestic and international consumption. His experiments in news broadcasting proved the voracious appetite of the American public for up-to-the-minute coverage of events worldwide. Bibliography Brenner, Daniel L., and Monroe E. Price. Cable Television and Other Nonbroadcast Video: Law and Policy. New York: Clark Boardman, 1986. Presents the regulatory and deregulatory framework of cable television and carriage, and includes a comprehensive overview of the Cable Communication Policy Act of 1984, FCC rulings, and judicial decisions. Of technical value to researchers as well as general readers. Denisoff, R. Serge. “Ted Turner’s Crusade: Economics Versus Morals.” Journal of Popular Culture 21 (Summer, 1987): 27-42. An interesting discussion of programming constraints and choices in television. Describes a balance between financial competitiveness and philosophical imperatives. Media Institute. CNN Versus the Networks—Is More News Better News? A Content Analysis of the Cable News Network and the Three Broadcast Networks. Washington, D.C.: Author, 1983. The brief analysis examines the news content and competitive context of programming. Sherman, Stratford P. “Ted Turner: Back from the Brink.” Fortune 114 (July 7, 1986): 24-31. The issue’s cover story, a profile of the man and the institutions he built. The writer portrays Turner as cocky, shrewd, and “wildly unorthodox.” Smith, Perry M. How CNN Fought the War: A View from the Inside. New York: Carol Publishing Group, 1991. Discusses television broadcasting, both foreign and domestic, at CNN. The network’s coverage of the Persian Gulf War receives particular attention. General discussion of the competition for news in television and in the press. Volkmer, Ingrid. News in the Global Sphere: A Study of CNN and Its Impact on Global Communications. Lutton: University of Lutton Press, 1999. Whittemore, Hank. CNN: The Inside Story. Boston: Little, Brown, 1990. Examines the pattern and scope of CNN’s television broadcasting, including insightful glimpses at the competitive strategy and organizational structure of the network. Not without a few ungrounded generalizations. Satch Ejike 703

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Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Congress Establishes the Federal Communications Commission (1934); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); Murdoch Extends His Media Empire to the United States (1976); A Home Shopping Service Is Offered on Cable Television (1985); Cable Television Rises to Challenge Network Television (mid-1990’s).

704

REAGAN PROMOTES SUPPLY-SIDE ECONOMICS Reagan Promotes Supply-Side Economics

Category of event: Government and business Time: 1981 Locale: Washington, D.C. By passing the Economic Recovery Tax Act of 1981, the U.S. Congress enacted supply-side tax cuts to stimulate the economy and enhance revenues Principal personages: Arthur Laffer (1940), the economist who pioneered the concept of supply-side economics and advised lawmakers such as Jack Kemp Ronald Reagan (1911), the president of the United States, 19811989 Jack Kemp (1935), the congressman who spearheaded efforts to pass the Economic Recovery Tax Act of 1981 George Gilder (1939), an economic analyst who provided ideas to implement the supply-side philosophy Summary of Event The Economic Recovery Tax Act of 1981 had its origins in a movement called supply-side economics that gained momentum in the early 1970’s. Arthur Laffer, a young economist out of the University of Chicago, had worked as a budget analyst for the Office of Management and Budget and made a set of daring economic predictions based on incentives in the tax system. He introduced the “Laffer Curve” to President Gerald Ford. The ideas represented by the curve are both simple and irrefutable: At a 0 percent tax rate a government will receive no revenue, and at a 100 percent tax rate a government will receive no revenue, because no one will work if all 705

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wages go to the government. Therefore, there must be some tax rate between 0 and 100 percent that maximizes tax revenues. Laffer estimated that the tax rate that would maximize revenues was about 15-20 percent for the top income earners, much lower than the rates of 40-60 percent then in place. He pointed out that his theory supported the tax cuts enacted by President John F. Kennedy in the early 1960’s. Those tax cuts were associated with increased revenues. Most important to Laffer were effects in two distinct areas. First, the wealthy paid a much higher share of total taxes after the cuts (both under Kennedy and in the 1920’s after the Coolidge-Mellon tax cuts of the same nature). Second, in both cases the tax cuts had dramatic positive effects on the economy. The business community stood to benefit most from the cuts. Businesses would benefit directly from the decreased rates and indirectly from the overall improvement in the economy likely to come as a result of the cuts. Because businesses and workers could keep a larger portion of their incomes, they would supply increased effort to productive endeavors; hence the term “supply-side” economics. Laffer was made into the “father” of the supply-side tax cuts by editorial writer Jude Wanniski. In 1976, Congressman Jack Kemp met with Laffer and Wanniski. He subsequently fleshed out Laffer’s proposals to cut taxes and introduced the ideas as legislation in Congress. At the same time, a powerful grass-roots revolt against higher taxes in California had culminated with the passage of Proposition 13, which limited the taxes that could be imposed without direct approval of the taxpayers. The federal budget started to grow dramatically during the presidency of Jimmy Carter. The federal budget deficit as a share of gross national product (GNP) also increased, from .3 percent in 1970 to 2.8 percent by 1980. Budget pressures acted to increase the rates of inflation and unemployment. Ronald Reagan won election as president in 1980 on his promise to cut taxes, relieve the burden on business, and “get government off the backs of the people.” Kemp and other Republicans in Congress already had started to forge a tax reduction package, but their efforts had been blocked by Carter. Early in 1979, however, the Joint Economic Committee, under the leadership of Senator Lloyd Bentsen (D-Texas) and Congressman Clarence Brown (R-Ohio), endorsed a supply-side policy in its economic report. The drain on the economy caused by high tax rates was clear to Reagan, who had been a Democrat until the 1960’s. Reagan’s familiarity with the Kennedy tax cuts (and his personal witnessing of the effects of the CoolidgeMellon cuts) convinced him that reducing marginal tax rates would accomplish two objectives. First, it would give individuals more money to invest. 706

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Reagan believed that individuals could make better decisions than could the government concerning investment. Second, lowering tax rates would reduce the government’s claim on individuals’ resources in relative terms. Even though his economic advisers pointed out that individuals’ tax payments might increase in dollar amount, the proportion of income devoted to government would in most cases decline. Upon election, Reagan immediately pushed for a Kemp-type tax cut of 30 percent, to be implemented in 1981. Even before the economic proposals could be presented, budget director David Stockman voiced opposition. He feared effects on the deficit. The Treasury Department already had compromised and proposed tax cuts of 10 percent per year for three years, rather than an immediate 30 percent cut. Stockman called for reducing the 1981 tax cut to 5 percent and delaying it until October. Eventually his proposal was enacted. Tax rates for the highest income levels were reduced from 50 percent to 33 percent. Laffer and other supply-side advocates noted that the main effects of the tax cuts would not occur immediately. The tax cuts were expected to affect investment, and investment plans take time to formulate and implement. In addition, some businesses might be prompted to postpone some of their new investment to take advantage of the even lower tax rates to come. Impact of Event Measuring the effects of the tax cuts on business is difficult because many factors influence business activity and such activity can be measured in various ways. Several statistics, however, are indicative of the success of the tax cuts. Real GNP (GNP adjusted for inflation) rose 3.6 percent in 1983, the first year that the full tax cut went into effect, and 6.8 percent in 1984. The rate of inflation, which was in the high teens during the Carter years, fell to 3.2 percent in 1983 and 4.3 percent in 1984. The unemployment rate dropped from 7.1 percent in 1980 to 5.5 percent by the end of Reagan’s term. The employment effects from the tax cuts were more impressive than the unemployment rate reflected, since millions of women had entered the workforce in the 1980’s. The decreased unemployment rate reflected those millions of people finding jobs in addition to previously unemployed people going back to work. As predicted in George Gilder’s Wealth and Poverty (1981), virtually all the impact of the tax cuts was on new businesses and small businesses, which accounted for all net job growth since 1980. Small business incorporations stood at record levels in the 1980’s, with no corresponding increase in business failures. Small businesses, in net, had produced most of the fourteen million new positions. Critics contended that the tax cuts produced 707

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part-time “burger flipper” jobs, but studies by several government agencies revealed that the service-sector jobs that had made up the majority of job creation during that period paid on average more than $10 an hour, more than double the minimum wage and enough to put workers into the middle class. Per capita after-tax income rose by approximately 25 percent from 1980 to 1988, even including the effects of the 1982 recession. Real GNP rose from $3.1 trillion to $4 trillion during the same period. The average level of prices, which almost doubled during the four years of the Carter Administration, rose approximately 20-40 percent (depending on the measure used) during Reagan’s eight years in office. Critics attempted to claim that such astounding improvements were “consumption driven” and that American industrial capability had suffered, refuting the notion that the tax cuts on the wealthy had resulted in investments in plant and equipment. That claim was refuted by American productivity increases, especially in manufacturing. U.S. industries such as steel used the 1980’s to downsize as well as to invest in new plant and equipment to replace outdated machinery. Critics of the Reagan tax cuts and supply-side philosophy argued that an economic boom would have occurred even without the policy changes. Economic indicators, however, showed improvements beyond those typical in a recovery. Clearly, the business community approved of and responded to the tax cuts. Supply-side economics changed the American economy in the 1980’s, essentially rescuing it from a decade of complacency and high-tax malaise. It also restored the role of investment and incentives to center stage in the economic debate. The success of supply-side tax cuts was questioned by liberals, who traditionally were opposed to smaller government and lower taxes, and even by some conservatives. Reagan’s vice president, George Bush, termed the notion that tax cuts could increase revenues “voodoo economics.” The primary criticism against the performance of the economy after the supply-side tax cuts focused on federal deficits, which reached record levels (before being adjusted for inflation), and the national debt, which by 1990 exceeded $4 trillion. Reagan was assailed as being the architect of the “twin towers of debt,” namely the domestic debt and the foreign trade deficit, which rose during the 1980’s. Critics maintained that the United States was borrowing to finance consumption and that the supply-side cuts had ushered in a rash of leveraged buyouts on Wall Street and the popularity of junk bonds. Businesses, they claimed, used the tax cuts as incentives not to invest in real plants and equipment but instead to make paper profits through buying and selling existing companies. 708

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Laffer’s primary theory concerning tax cuts related to revenues. It is irrefutable that the wealthiest taxpayers paid significantly more in taxes and reported more capital gains (profits on investments) than they had at the higher tax rates. The share of all taxes paid by the top income earners rose. At the height of the war in Vietnam and as the Great Society programs peaked, federal spending stood at 19.8 percent of GNP. Ten years later, as Reagan took office, the federal government’s spending as a share of GNP had risen to more than 22 percent, and at the time the tax cuts went into effect, the figure had risen to almost 24 percent. Spending, rather than decreases in tax revenue, apparently caused rising government budget deficits. In addition, each year after 1983, the deficit as a proportion of GNP fell. Increases in the deficit reflected the fact that the American economy had grown and prices had risen; removing those factors showed that the relative burden of the deficit was smaller. By the time Reagan left office, the federal deficit as a share of GNP was smaller than it was in 1975 by almost 1 percent and almost exactly what it was when Reagan took office in 1980. Another criticism of the supply-side tax cuts’ effect on business held that the United States had become a net importer of foreign capital, which was used by Americans to finance a consumption binge rather than to invest in U.S. businesses. Evidence against that argument shows that the supply-side cuts made investing in American business and manufacturing so rewarding that banks and individual investors kept their money home for the first time in a decade. Banks, however, began to write off loans to Argentina, Mexico, and other Latin American nations. This caused changes in the capital account, but the real events behind those changes actually had been occurring over a long period of time. Thus, the trade deficit was illusory, and to the extent that a capital inflow existed, it occurred only because U.S. investors, like everyone else, realized that the tax cuts had made the United States a much more profitable place to do business. The last area in which the supply-side tax cuts were criticized came in the appellation “decade of greed.” Critics suggested that the tax cuts encouraged personal consumption at the expense of charitable giving, since the tax deduction for a charitable contribution of a given size now reduced taxes by a smaller amount than previously. Charitable contributions by individuals actually grew faster in the 1980’s than in the late 1970’s. In short, the achievements of the supply-side tax cuts were clear and substantial. The American economy showed its greatest boom since the 1920’s, employment soared, small businesses thrived, American manufacturing staged a resurgence, and the wealthy paid more in taxes, invested more, and gave away more than in the previous decade or under higher tax 709

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regimes. Analyses of government budgets showed that total tax revenues rose after the cuts, especially after the third installation of the cut. Nevertheless, the incentives created by lower tax rates raised U.S. productivity to its highest levels in a decade, levels that matched those of America’s closest foreign competitors. Lost in the debates were the increases in the tax burden for most Americans in the tax “reform” package of 1986 and the “deficit reduction package” of 1990. The net effect of the two groups of laws was to increase the actual taxes most Americans had to pay. The 1986 laws eliminated numerous tax deductions, and the subsequent deficit reduction package increased taxes on a variety of items. Overall, the negative effects of the two tax increases dampened the economy to such an extent that full-fledged recession set in by 1990 and had not been alleviated by 1992. Further “deficit reduction plans” only promised higher levels of taxes, suggesting that the favorable business climate that had existed in the 1980’s had all but disappeared by 1993. Bibliography Fink, Richard H., ed. Supply-Side Economics: A Critical Appraisal. Frederick, Md.: University Publications of America, 1982. A collection of essays by proponents and opponents of supply-side tax cuts. Contains debates on most of the crucial issues but does not address any of the economic effects of the Reagan program. Gilder, George. Wealth and Poverty. New York: Basic Books, 1981. The “bible” of early supply siders. Incoming president Ronald Reagan reportedly handed out copies of this book to his entire staff as a guide for public policy. Gilder is perceptive and clear in his analysis yet has been dismissed by some supply-side writers (as has Arthur Laffer) who call his work “journalistic” or “unscholarly.” Nau, Henry R. The Myth of America’s Decline. New York: Oxford University Press, 1990. A thorough and convincing, if somewhat restrained, analysis of American economic performance since 1960. Nau, a former State Department official, offers an insider’s view of policy-making while applying his economic and quantitative skills to issues of international growth. He concludes that the resurgence of the U.S. economy during the 1980’s resulted from policies enacted between 1982 and 1985. Puth, Robert C. American Economic History. 3d ed. Fort Worth, Tex.: Dryden Press, 1993. A standard and useful economic history that covers the modern period. It repeats some of the deficit/debt fallacies. Raboy, David G., ed. Essays in Supply Side Economics. Washington, D.C.: 710

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Institute for Research on the Economics of Taxation, 1982. A set of scholarly essays by economists and historians. The essays examine various aspects of supply-side economics such as the rational expectations model, the theoretical heritage of supply side, and the distortions of taxation and savings that can develop. Roberts, Paul Craig. The Supply-Side Revolution: An Insider’s Account of Policymaking in Washington. Cambridge, Mass.: Harvard University Press, 1984. Written by a former Kemp adviser who served in the Treasury Department under Reagan, this book provides an excellent insider history of the tax cut battle. Roberts criticizes Laffer and those in the administration who had broader goals for the economic program. Wanniski, Jude. The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books, 1978. One of the earliest published advocacy pieces for supply-side tax cuts, Wanniski’s book also provides one of the first published analyses of the causes of the Great Depression that links the Smoot-Hawley Tariff to the stock market crash. A clear and persuasive discussion of the positive effects of low tax rates. Larry Schweikart Cross-References The Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy (1964); Defense Cutbacks Devastate the U.S. Aerospace Industry (1980’s); Insider Trading Scandals Mar the Emerging Junk Bond Market (1986); Drexel and Michael Milken Are Charged with Insider Trading (1988); Mexico Renegotiates Debt to U.S. Banks (1989).

711

FEDERAL REGULATORS AUTHORIZE ADJUSTABLE-RATE MORTGAGES Federal Regulators Authorize Adjustable-RateMortgages

Category of event: Finance Time: March, 1981 Locale: Washington, D.C. Adjustable-rate mortgages enabled banks to hedge against inflation while offering borrowers low initial interest rates Principal personages: Jay Janis (1932), the president of the Federal Home Loan Bank Board, 1979-1980 John H. Dalton (1941), the president of the Federal Home Loan Bank Board, 1980-1981 Richard T. Pratt (1937), the president of the Federal Home Loan Bank Board, 1981-1983 John G. Heimann (1929), the comptroller of the currency, 19771981 William Poindexter IV (1944), the chairman of the U.S. Senate Banking Committee in 1981 Summary of Event Adjustable-rate mortgages (ARMs) are loans for which the mortgage rate fluctuates along with the market interest rate. This type of mortgage instrument is an alternative to the traditional fixed-rate mortgage (FRM). The interest rate on an ARM usually is tied to a reference interest rate. ARM contracts include several other stipulations, including the frequency of inter712

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est rate changes, the maximum permissible change in monthly payments, and the low initial rate. ARMs are also referred to as variable-rate mortgages. ARMs were introduced in California as early as 1975. Four years later, the Federal Home Loan Bank Board (FHLBB), which oversaw the activities of savings and loans institutions (S&Ls) nationwide, authorized ARMs on a national scale. The move was spearheaded by Jay Janis, the president of the FHLBB at the time. These early ARMs were subject to substantial limitations with respect to changes in their interest rates. In 1981, FHLBB president John Dalton and Comptroller of the Currency John G. Heimann authorized nationwide use of ARMs with all restrictions removed, despite earlier criticism by the Senate Banking Committee, chaired by William Poindexter IV. Their decision was prompted by a sharp increase in interest rates that hindered housing sales and construction. Variability allowed in interest rates on the new ARMs was to be determined by the individual borrowers and lenders. One way to simplify discussion of ARMs is to think of them as series of short-term mortgages, each with a maturity equal to the length of the adjustment period. The interest rate at a given time is the sum of two elements: an index of market interest rates and a fixed margin. A borrower’s monthly payments therefore would change as a result of fluctuations in the interest rate index. The two most popular market indexes are the interest rate on one-year Treasury bills and the Eleventh District Cost of Funds. The latter is a weighted average of interest rates on deposits for S&Ls located in California, Arizona, and Nevada. Despite being specific to only one region, over time this index has mirrored the national average of interest rates on deposits. Each ARM is matched with an index of corresponding maturity. For example, a six-month ARM (one with interest rate adjustments every six months) is pegged to the interest rate on Treasury bills with a maturity of six months, a one-year ARM to the rate on Treasury bills maturing in one year, and so on. ARM frequencies of adjustment typically varied between six months and five years in the early 1990’s. (All examples will be for that time period unless otherwise stated.) The most popular is the one-year ARM. The shorter the adjustment period, the more frequent the fluctuations in monthly payments, with ARMs having longer adjustment periods resembling fixedrate mortgages. An adjustment takes place following a change in the ARM interest rate index. The most common way to adjust the monthly payments is by an amount proportional to the change in the index. In order to limit the increase in monthly payments, ARMs are subject to periodic caps and lifetime caps. Periodic caps limit the amount that the interest rate can increase or decrease at each adjustment. The periodic caps 713

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vary with the frequency of the adjustment periods. A typical periodic cap on a one-year ARM is 2 percent. Lifetime caps and floors limit the range of change in the interest rate over the entire course of the loan. The lifetime cap is expressed as a change from the mortgage’s initial rate. A typical lifetime cap or floor is 5 percent. For example, if a one-year ARM has an initial rate of 8 percent, a periodic cap of 2 percent, and a lifetime cap of 5 percent, then the interest rate will be between 6 and 10 percent in the second year and will never fall below 3 percent or rise above 13 percent. To make ARMs more appealing than fixed-rate mortgages, lenders often offer initial rates that are lower than the prevailing market mortgage rate. These are called teaser rates and are temporary. At the first adjustment, the teaser rate is replaced by the market interest rate index plus the margin. There is no general rule for how attractive teaser rates should be. Generally, teasers vary inversely with the loan origination fees, commonly called points. Lenders vary in the points charged to borrowers. The higher the points, the more attractive the teaser rate is likely to be. Borrowers have to look for the best combination of interest rates and fees. Although ARMs provide several benefits to borrowers, including low initial rates and the ability to benefit from falling interest rates without refinancing, their features are complex and can hide surprises. For example, a mere 2 percent increase in interest rates could raise monthly payments by 25 percent under reasonably likely conditions. This can occur because the first few payments on a loan are almost entirely interest payments, with little payment of principal. A rise of 2 percent in the interest rate with an initial rate of 8 percent thus would cause payments to rise by about 25 percent. The borrower’s ability to pay may not increase by the same proportion. For example, interest rates may rise in response to expected inflation that has not yet caused higher wages. Another disadvantage with ARMs is that although their initial rate is tempting, borrowers have a difficult time comparing them with their FRM counterparts. Because the value of an ARM changes frequently with market interest rates, a borrower is forced to guess the future trend in mortgage rates before making a choice between an ARM and an FRM. As a result, borrowers often select an FRM because they know that the monthly payment will never change. Impact of Event The core business of savings and loan associations is the issuance of home mortgages. S&Ls raise funds by offering their customers checkable and time deposits. Traditionally, most of their assets consisted of fixed-rate 714

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thirty-year mortgages, whereas their liabilities were typically short-term certificates of deposit with a maximum maturity of five years. Because of the nature of their business, raising funds short term and lending long term, S&Ls are particularly vulnerable to interest rate risk. For example, if market interest rates rise, S&Ls would be forced to raise deposits on the open market by paying high deposit rates while earnings from fixed-rate mortgages remained stagnant. Falling interest rates benefited S&Ls, but borrowers had the option of paying back their mortgages and refinancing at lower rates. Interest rate risk posed only small problems as long as rates were relatively stable. The period from 1976 through 1982, however, was marked by the most volatile interest rates in modern U.S. economic history. FRM rates rose sharply from 9 percent in 1976 to 16 percent in 1982, driving many S&Ls out of business. This increase was a result in part of tight monetary policy pursued by the Federal Reserve System in a long effort to fight inflation. The crucial role of ARMs during that period was their fundamental feature of shifting interest rate risk to borrowers. On the traditional fixed-rate mortgages, the lender bore the entire risk from interest rate increases. After 1982, a combination of volatile interest rates, a deregulatory political environment, and widespread mismanagement compounded the problems of S&Ls. By 1989, the S&L industry required a $150 billion rescue plan. The 1989 bailout legislation, known as the Financial Institutions Rescue, Recovery, and Enforcement Act (FIRREA), rescinded investment powers that many S&Ls had abused. A notable example was the right to invest in highly speculative “junk” bonds. Many S&Ls had invested in junk bonds to increase earnings as a way of paying the higher interest rates on deposits. When issuers of junk bonds defaulted, those S&Ls faced losses and even bankruptcy. Perhaps the major shortcoming of FIRREA is that it failed to address the gap in maturity between S&L assets (mortgages) and liabilities (deposits). That gap was at the root of the interest rate risk that resulted in disaster. The problems of the S&Ls could have been alleviated by avoiding FRMs and issuing primarily ARMs. S&Ls, however, use their fixed-rate mortgages to speculate on the future course of interest rates. If interest rates are expected to fall, S&Ls will issue fixed-rate rather than variable-rate mortgages, hoping to lock in the currently high rates. S&Ls did not want to give up an instrument that enabled them to bet on the trend of future rates, with enormous rewards for correct predictions. It is the riskiness of long-term mortgages that makes them unsuitable for thrift institutions, which ideally should be averse to risk. Although the odds of an interest rate increase or 715

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decline are equal on average, their impact on thrifts is asymmetric because borrowers have the option to refinance their mortgages when rates fall. A fundamental difficulty in evaluating mortgages lies in the prepayment option that a borrower can exercise and how it is affected by changes in interest rates. When interest rates go down, borrowers rush to refinance their existing mortgages at lower rates in order to reduce their monthly payments. This poses a problem for the S&L lender, because it causes an early redemption of principal that will have to be reinvested at a lower market interest rate. Conversely, when rates increase, borrowers delay prepayment. This often takes the form of continuing to live in a current home rather than selling, prepaying the mortgage, and getting a new mortgage on a new home. For example, a borrower would take into consideration the cost of giving up a below-market mortgage at 8 percent on a current home and getting a new one at 12 percent on a new house. At the same time, a rise in interest rates reduces S&L profits because existing assets are earning a below-market rate of return. Mortgage refinancing on ARMs is less significant than on fixed-rate counterparts primarily because an ARM’s interest rate mimics the movement in the market interest rate. That is not to say that ARMs are immune from prepayment. Borrowers often prepay on existing ARMs in order to substitute others at lower initial rates. Soon after they were introduced, ARMs accounted for 40 percent of all mortgage originations. In 1984, more than 65 percent of all new residential mortgages issued by S&Ls were ARMs. By mid-1987, however, as interest rates started to decline, many S&Ls returned to FRM lending, and the share of ARMs fell. The mortgage expansion during that period triggered by a strong housing sector led to a large increase in the dollar amount of ARMs in lenders’ portfolios. By 1992, the share of ARMs had stabilized at about 25 percent. As both the level and volatility of mortgage interest rates declined, FRMs regained their lost appeal. It is unclear how the real estate market would be affected if S&Ls stopped issuing FRMs altogether. Most economists argue that the impact on housing demand would be minimal, primarily because ARMs are subject to restrictions on how much their monthly payments can adjust in a given year. An analysis of the period preceding the introduction of ARMs shows that housing starts were significantly inversely related to mortgage rates: The higher the mortgage rates, the smaller the volume of housing starts. After 1982, this relationship became weaker as a result of the ARMs’ low initial interest rates. Despite high mortgage rates during that period, housing starts were brisk as home buyers switched to the cheaper ARMs. After 1986, the relationship between housing starts and FRM interest rates 716

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was much weaker, since borrowers could choose low initial rates through ARMs. When rates began to drop after 1989, home buyers switched back to FRMs to lock in low rates. It thus appears that ARMs ease the impact of high mortgage rates on the housing sector and complement the role of FRMs in mortgage lending. Equally important is the growth in housing caused by the introduction of ARMs. Because of their low initial rates, homeowners unable to qualify under the guidelines of FRMs may very well be able to qualify for ARMs with lower initial monthly payments. This important feature made housing affordable to a larger share of the population, as evidenced by the explosive growth in housing sales from 1982 to 1984. Housing starts grew by almost 85 percent during that period. The introduction of ARMs made the housing sector more resilient to economic slowdowns and less sensitive to changes in interest rates. Bibliography Jaffee, Dwight M. Money, Banking, and Credit. New York: Worth, 1989. An intermediate text in money and banking. Well written by a distinguished professor of economics. Using simple examples, the author discusses how ARMs can reduce interest rate risk. Kamerschen, David R. Money and Banking. 7th ed. Cincinnati, Ohio: South-Western, 1980. A standard textbook in money and banking. Accessible to the beginning reader. Mayer, Thomas, James S. Duesenberry, and Robert Z. Aliber. Money, Banking, and the Economy. 4th ed. New York: Norton, 1990. Includes updated material on the relationship between ARMs and the S&L crisis. Easy to read. Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Smith, Gary. Money, Banking, and Financial Intermediation. Lexington, Mass.: D.C. Heath, 1991. A primer in this area. Helpful examples show how changes in interest rates affect a homeowner’s monthly payments. Provides a discussion of loan eligibility criteria. White, Lawrence J. The S&L Debacle. New York: Oxford University Press, 1991. Written for a nonacademic audience. Traces the origins of the S&L crisis to the fixed-rate mortgage instrument. Detailed discussion of events preceding and following introduction of ARMs. Sam Ramsey Hakim Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); The Banking Act of 1933 Reorganizes the American Banking System (1933); 717

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The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); Roosevelt Signs the G.I. Bill (1944); Congress Deregulates Banks and Savings and Loans (1980-1982); Bush Responds to the Savings and Loan Crisis (1989).

718

AIR TRAFFIC CONTROLLERS OF PATCO DECLARE A STRIKE Air Traffic Controllers of PATCO Declare a Strike

Category of event: Labor Time: August 3, 1981 Locale: The United States In an effort to win labor contract disputes, the Professional Air Traffic Controllers Organization (PATCO) declared an illegal work stoppage on August 3, 1981, to bring nationwide air traffic to a halt Principal personages: Ronald Reagan (1911), the president of the United States, 19811989 Robert E. Poli (1936), the president of PATCO, 1980-1981 Gary W. Eads (1945), the president of PATCO beginning in 1982 Andrew Lewis (1931), the U.S. secretary of transportation, 19811983 William Clay (1931), a U.S. congressman Summary of Event On August 3, 1981, the Professional Air Traffic Controllers Organization (PATCO), under the direction of Robert E. Poli, union president, declared an illegal nationwide strike of 14,500 members. Approximately 11,500 members walked off their jobs because of contract disputes with the Federal Aviation Administration (FAA). PATCO’s illegal work stoppage temporarily left thousands of passengers stranded at airports throughout the world and caused the cancellation of thousands of scheduled flights. This unprecedented move came as a surprise, since a strike of federal employees against the government of the United States was illegal. The reaction to the 719

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illegal strike by President Ronald Reagan’s administration was also unprecedented. An ultimatum was handed down demanding that the controllers return to work within forty-eight hours. Those who refused would be fired from their jobs. Labor negotiations faltered, and the strikers maintained their walkout past the deadline. The strikers were summarily fired from their jobs and ultimately were banned from ever working as federal air traffic controllers again. Events leading to the drastic action of PATCO members and the federal government’s response went back several years. During the early 1960’s, working relations between controllers and FAA management and supervisors gradually deteriorated. Controllers felt overwhelmed by working conditions, the wage negotiations process, and the general lack of management support. In 1968, a core of frustrated New York City controllers formed a professional association known as the Professional Air Traffic Controllers Organization (PATCO). F. Lee Bailey, a renowned criminal lawyer, agreed to draft the association’s charter and assumed directorship of the association until June, 1970. At the June, 1970, PATCO convention in Las Vegas, Nevada, the PATCO board of directors elected John F. Leyden as the union’s second president. Leyden would serve as PATCO’s president from 1970 to 1980. In 1970, PATCO also filed with the Department of Labor for official recognition as an affiliate of the American Federation of LaborCongress of Industrial Organizations (AFL-CIO) and was so certified. During PATCO’s formative years, the association flexed its newly recognized organizational muscle and challenged its supervising body, the FAA. Only seven months after organization, controllers initiated a “work by the book” slowdown (following all regulations precisely, thus working at a slowed pace) in New York City after they decided that air traffic congestion had reached critical proportions. In March, 1970, three thousand controllers struck for twenty days after the FAA tried to carry out an involuntary transfer of four controllers from Baton Rouge, Louisiana. The FAA fired fifty-two striking controllers, of whom forty-six were later reinstated to their positions, and suspended nearly one thousand more controllers for a short period of time. In June, 1978, a federal court judge fined PATCO $100,000 for a “work by the book” slowdown aimed at specific airlines that had refused to allow controllers free rides overseas on jump seats for “familiarization training.” This rather militant history of job actions and FAA challenges led some PATCO members to feel disenchanted with the leadership of John Leyden. In January, 1980, Leyden submitted his resignation and left an opening for a more activist member, Robert E. Poli. In April, 1980, after a tough and mean-spirited election, Poli was elected as PATCO’s third president. 720

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It was within this charged environment that PATCO began efforts to campaign for enhanced contract negotiations. In early 1980, Congressman William Clay (D-Missouri) drafted H.R. 1576, the Air Traffic Controllers Act of 1981. Under the bill’s provisions, PATCO members would have won the following job concessions: a higher wage scale than the one that applied to government workers generally, a cost-of-living provision, compensation for “unusual or strenuous hours of work,” reduction of work from forty hours a week to thirty-two, a retirement plan that “objectively recognizes the unusual occupational hazards of such employment,” a substantial increase in the number of controllers, and the clarification of FAA obligations in the bargaining process. After introduction of Congressman Clay’s bill, the Congressional Budget Office concluded that the bill would cost $13 billion over a five-year period. The media quickly publicized objections to the cost, and Poli was put on the defensive even before the scheduled FAA-PATCO contract negotiations began. In mid-February, 1981, negotiations began between the FAA and PATCO. Poli opened the bargaining session with a list of ninetysix demands and made it clear that three of PATCO’s demands were major concerns of his 14,500 members. First, he requested a $10,000 across-theboard annual pay increase for all controllers, along with a twice-a-year cost-of-living increase that would be one and one-half times the rate of inflation and a new maximum salary of $73,420, up from $49,229. Second, the union requested a reduction in the five-day, forty-hour week to a four-day, thirty-two-hour schedule. Third, Poli asked for a liberalization of provisions for retirement. After fruitless negotiations, PATCO’s working contract expired on March 15, 1981. At the PATCO convention in May, 1981, Poli announced that PATCO would strike on June 22, 1981, if labor demands were not met. Just before the June 22 deadline, Andrew Lewis, the new U.S. secretary of transportation, made PATCO a counteroffer. The FAA package included $40 million in improvements, complete with a 10 percent pay hike for controllers who also acted as instructors, an increase in the pay differential for night work to 15 percent, and a guaranteed thirty-minute lunch period. In addition, Poli negotiated a “responsibility differential” whereby controllers would earn time-and-a-half pay after thirty-six hours worked in a week. Medically disqualified controllers would be eligible for the Second Career Program and extra training benefits. Poli got acceptance for this FAA proposal from his executive board. Ten days later, however, upon taking the negotiated proposal to the general membership, Poli met with resistance. Put to a membership vote, the tentative contract collapsed by a margin of twenty to one. On July 31, 721

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Poli called a news conference. He emphasized again that if the government would not agree to the union’s three principal demands—the $10,000 raise, the thirty-two-hour week, and improved retirement benefits—the controllers would strike on August 3, 1981. The FAA raised its offer to a $50 million package with various conditions. Poli rejected the conditions, and PATCO officially went out on strike on the morning of August 3, 1981. Impact of Event The illegal PATCO work stoppage on August 3, 1981, was an attempt to bring nationwide air traffic to a halt and thereby put pressure on governmental negotiators. President Reagan’s response to the strike effort was swift and decisive. On the day that it began, he declared the PATCO strike as illegal and replied with a stiff ultimatum to strikers—get back to work within forty-eight hours or be fired. In a Rose Garden presentation, President Reagan repeated an oath that Congress required all federal employees to take: “I am not participating in any strike against the Government of the United States or any agency thereof, and I will not so participate while an employee of the Government of the United States or any agency thereof.” Approximately 11,300 PATCO members remained off the job. The president remained firm in his demands, and the striking controllers were summarily fired for their lifetimes from their jobs as air traffic controllers. Although the initial shock of the strike was significant, within three days the level of air traffic was approximately three-fourths of what it had been prior to the strike. PATCO’s plan of bringing the air traffic control system to a halt simply was not realized. This is not to imply that there was no loss of revenues or severe hardships during this period. The airlines estimated that they lost anywhere from $30 to $35 million per day as a result of canceled flights and fewer passengers willing to risk the chance of suffering cancellations or delays in their airline travel. The Air Transport Association (ATA) estimated losses during the first two weeks of the strike at $210 to $315 million. Financial losses aside, however, PATCO leaders made four strategic errors that all but doomed their strike from the very start. First, they underestimated the ability of the FAA to continue operations without the aid of the striking controllers. The FAA was able to rely on approximately 5,275 managers and supervisors, 3,225 nonstriking PATCO members, and an initial force of 500 military air traffic controllers to maintain air traffic control throughout the country. In addition, the FAA had secretly devised an emergency flight control plan (known as the 75-50 Flow Control Plan) that would reduce air traffic to a manageable level. Specifically, only one-half of the regularly scheduled flights at twenty-two of the nation’s 722

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largest airports were allowed to fly for a period of at least a month. The airlines had the jurisdiction to cancel the flights they thought were appropriate. In addition, the FAA closed sixty smaller control towers and spaced flights further apart in both distance (from five to twenty miles for jets on the same route) and time. Second, PATCO overrated the value of its campaign endorsement in 1980 to thenpresidential candidate Ronald Reagan. PATCO was one of the few unions to endorse Ronald Reagan during the campaign. A letter from Reagan to Poli was misread to im- Although Ronald Reagan began his political caply total and unyielding sup- reer as a labor leader himself, he was completely port. In the letter, Reagan unsympathetic to the PATCO leaders’ call for a commented on “the deplorable strike. (White House Historical Society) state of our nation’s air traffic control system” and assured Poli that “if I am elected President, I will take whatever steps are necessary to provide our air traffic controllers with the most modern equipment available, and to adjust staff levels and workdays so they are commensurate with achieving the maximum degree of public safety.” He also pledged that his administration would pursue a spirit of cooperation between the president and the air traffic controllers. Third, PATCO ignored Reagan’s often-voiced revulsion to strikes by federal employees and the length to which he was prepared to go in retaliation. Reagan’s contention was that there was no strike. Federal law (Title 5, Section 7311 of the U.S. Code) states that a federal civil servant may not continue to hold his or her job if he or she takes part in a strike against the government. Reagan therefore was adamant that if the controllers walked off their jobs, they had quit. Such a philosophy did not go unnoticed by other federal unions. Fourth, PATCO failed to gain the support of other unions and the public. The union hoped that this support would bring additional pressures against the Reagan Administration. Prior to the strike, Poli did not inform or seek 723

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advice from other union leaders. The walkout caught AFL-CIO president Lane Kirkland and United Auto Workers president Douglas Fraser off guard and unprepared to assist. Although both unions paid supporting lip service to the PATCO strike, both unions refused to fully back the strike or provide financial support. Public support was also blatantly missing from the PATCO strike. Gallup polls from August 6 and 7, 1981, showed 52 percent support for the government and only 29 percent for the controllers. In addition, 67 percent of respondents thought PATCO was wrong in breaking the federal oath not to strike against the government. On October 22, 1981, the Federal Labor Relations Authority (FLRA) voted to decertify PATCO. This was the first time the authority had stripped a government workers’ union of its bargaining rights. The three-member FLRA panel stipulated that PATCO had called, participated in, and condoned a strike. This was a clear violation of federal laws forbidding strikes by government employees. On December 31, 1981, Poli resigned as PATCO president. He was replaced by PATCO’s fourth president, Gary W. Eads, on January 1, 1982. In July, 1982, the Circuit Court of Appeals upheld the PATCO decertification decision of the FLRA, and PATCO was officially terminated. The termination sent a strong message to other unions of federal employees that strike behavior would not be tolerated. Bibliography Alter, Jonathan. “Featherbedding in the Tower: How the Controllers Let the Cat Out of the Bag.” The Washington Monthly 13 (October, 1981): 22-27. Contends that PATCO’s air traffic controllers were actually overstaffed and that the union was “featherbedding” members in the towers, keeping employment unnecessarily high. Alter discloses that before the strike, nineteen thousand controllers and supervisors handled air traffic. After the strike began, nine thousand workers handled 75 percent of normal traffic. Kilpatrick, James J. “They Struck a Blow for Tyranny.” National Review 33 (October 2, 1981): 1132-1137. Discusses the PATCO strike and its blatant violation of federal law. He acknowledges that the strike caused financial losses but notes that it may also have resulted in gains beyond the price in awakening the nation to the perils of public employee unionism. Magnuson, Ed. “The Skies Grow Friendlier.” Time 118 (August 24, 1981): 14-16. Discusses the chronology of events following the PATCO strike on August 3, 1981. Emphasizes President Reagan’s firm reaction to the strike and the imposed firing of striking controllers. Also explains how the FAA was able to maintain air traffic control at ever-increasing levels. 724

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_____. “Turbulence in the Tower.” Time 118 (August 17, 1981): 14-21. Discusses the initial impact of PATCO’s job walkout across the country and the FAA’s emergency procedures implemented to maintain air traffic control in the initial hours of the strike. Meadows, Edward. “The FAA Keeps Them Flying.” Fortune 104 (December 28, 1981): 48-52. Discusses the FAA’s reaction to the PATCO strike. The article discusses regulations implemented to handle diminished air traffic with fewer controllers as well as the plans for replacing PATCO members who were fired because of their strike participation. Morganthau, Tom. “Who Controls the Air?” Newsweek 98 (August 17, 1981): 18-24. Provides an excellent summary of the events leading up to the PATCO strike against the FAA. Also discusses the FAA’s emergency response to the strike as well as the Reagan Administration’s immediate and severe reaction to the striking controllers. Nagy, David. “How Safe Are Our Airways?” U.S. News and World Report 91 (August 24, 1981): 14-17. Provides an excellent chronology of the PATCO strike. Explains in detail why the PATCO strike had little chance of success. Nordlund, Willis J. Silent Skies: The Air Traffic Controllers’ Strike. Westport, Conn.: Praeger, 1998. Shostak, Arthur, and David Skocik. The Air Controllers’ Controversy. New York: Human Sciences Press, 1986. Shostak, a union researcher and consultant, and Skocik, a fired PATCO member, provide an extremely detailed account of the PATCO strike. Although at times biased, the book provides excellent insight into the birth, growth, and final demise of PATCO. John L. Farbo Cross-References The DC-3 Opens a New Era of Commercial Air Travel (1936); Amtrak Takes Over Most U.S. Intercity Train Traffic (1970); Carter Signs the Airline Deregulation Act (1978).

725

IBM INTRODUCES ITS PERSONAL COMPUTER IBM Introduces Its Personal Computer

Category of event: New products Time: August 12, 1981 Locale: Armonk, New York After other companies had pioneered in the production and sale of personal computers, IBM entered the product area in 1981 and for a while seemed likely to dominate the field Principal personages: Philip Don Estridge (1938-1985), the IBM executive in charge of the company’s personal computer strategy and production Frank Cary (1920), a chairman and chief executive officer of IBM Steven Jobs (1955), a cofounder of Apple Computer John Akers (1934), the chairman of IBM who presided over the decline of the IBM PC program Summary of Event The computer revolution, which began shortly after the end of World War II, seemed to have reached a state of maturity by the late 1960’s. At that time, International Business Machines (IBM) dominated the field, producing large machines called mainframes used primarily by government agencies and major corporations. IBM’s chief rivals in the mainframe business were Burroughs, Univac, National Cash Register, Control Data, Honeywell, Radio Corporation of America, and General Electric. On the horizon were such significant Japanese companies as NEC, Fujitsu, and Hitachi. The industry’s attention was concentrated on IBM, its rivals, and mainframes. A small number of hobbyists became interested in much smaller ma726

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chines. These could be assembled from parts and were inexpensive enough to be used by individuals rather than corporations and government agencies. The movement toward smaller machines began in 1971 with Marcian Edward “Ted” Hoff, Jr., who worked at Intel, an electronics manufacturer. Hoff designed and then created the first microprocessor, or computer on a chip. The 4004 was little more than a curiosity, but even then Hoff knew that it could become the heart of a small computer.

Ted Hoff holds one of the computer chips he invented while with Intel in 1971. (Intel Corporation)

Scientists at the small, New Mexico-based electronics firm of Instrument Telemetry Systems had the same realization. In 1975, they created the Altair, a $400 kit from which could be assembled a small computer that contained the 8080 microprocessor. Peripheral equipment costing about $2,000 would allow a hobbyist to assemble a complete small computer. Other kits followed, most sold from small stores catering to hobbyists. 727

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The market for small computers then developed through other channels. In the late 1970’s, Commodore International came out with the PET, a preassembled computer. Heath offered computer equipment through catalogs, and Radio Shack, a chain store, offered the TRS-80 computer, which sold for $499. The real breakthrough, however, came from another firm, Apple Computer. Founders Steven Jobs and Stephen Wozniak had produced the Apple I, a relatively weak machine, and then went on to create the Apple II, which was demonstrated at the West Coast Computer Fair in 1977. Apple took orders for the small machine and was surprised by the demand. The company grew rapidly, achieving $2.5 million in revenues in 1977, then $117 million in 1980. Other companies also made their mark, among them Kaypro and Osborne. By the late 1970’s, it appeared that the small computer was an established part of the market. Observing all of this was IBM Chairman Frank Cary, who was in the midst of revamping the corporation by attempting to shed its traditional, slow-moving, bureaucratic structure. Those efforts had met with limited success, but Cary had introduced an element of flexibility into the firm. The key was the restructuring of the General Systems Division. Important new facilities were created far from the Atlanta, Georgia, headquarters. By the end of the 1970’s, installations in Boulder, Colorado, and San Jose, California, were filled with bearded, sandaled young men who were far different from what the public had come to expect from IBM. Cary selected Philip Don Estridge, a middle manager, to head a team that would create a small computer that would be IBM’s entry into the product area. Estridge and his associates were based in a ramshackle building in Boca Raton, Florida. Cary ordered that Estridge was to work undisturbed by the IBM bureaucracy. Estridge and his team created the PC, which was designed to run on the DOS (Disk Operating System) that Bill Gates of Microsoft had purchased for $75,000. The computer, known as the IBM PC, was introduced on August 12, 1981. It was an instant hit; IBM could not produce enough of the product to keep up with demand. Unlike Apple, IBM did not insist on retaining patent or other rights to software. This meant that Microsoft, Lotus, and other vendors were free to offer it to other PC manufacturers. Nor did IBM attempt to prevent Intel, which provided the PC’s chips, from dealing with rivals. The approach all but ensured that the IBM machines would become the standard for the industry and that “clone” manufacturers would proliferate. Soon came the creation of Compaq, Columbia, Corona, Dell, and many more manufacturers producing machines intended to emulate the IBM PC. Wang came out with a dedicated word processor that soon became 728

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the class of the industry. In time, Japanese, Korean, Dutch, and British computers came to market as well. Even so, in the beginning IBM led the pack, primarily because of the company’s financial clout and reputation. In the early 1980’s, most computer purchasers had little notion of the machines’ capabilities or even the names of the clone manufacturers. They had heard of IBM, one of the most honored and trusted nameplates in the business machines market. They purchased the IBM PC, even though it cost more than the others, because of that reputation. The PC was a huge success, far greater than IBM anticipated it would be. At the time, IBM sold or leased about 2,500 mainframes a year. The company sold about 200,000 PCs in the first year that the product was on the market. Soon the company was selling that many a month. The profit

The original IBM PC/XT computer. (International Business Machines Corporation)

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margins were lower than for mainframes, but the returns were still gratifying. Estridge did not rest on his laurels. One of the few people at IBM who had a thorough knowledge of the personal computer industry and who recognized that rapid change would be the rule, he appreciated that the PC soon would become obsolete. He rushed the introduction of the XT, with a hard disk, and then the PC AT (advanced technology), a faster machine. These products were released in 1983. The XT and AT duplicated the original PC’s success. By then, IBM had 75 percent of the personal computer business. Impact of Event It was then that the company took the first of several missteps. Aiming at a home market for computers that did not develop until the late 1980’s, it released the IBM PCjr in 1983. IBM was fearful of cutting into the XT market and so designed the new machine with low power and a smaller keyboard. It was unable to run the Lotus 1-2-3 spreadsheet, one of the most popular programs of the period, and customers complained that the keyboard was difficult to use. Expected sales failed to materialize, and within months it was clear that IBM had stumbled badly. The company cut prices, added features, offered to replace keyboards on previously purchased machines, and stepped up advertising. Nothing worked. In 1985, IBM announced that the PCjr would “fulfill its manufacturing schedules,” meaning that it would be killed. By then, Estridge was more involved in IBM’s internal politics and in the process of being edged out of the operation. In 1985, he died in an airplane crash, and others took over the PC operation. Other blunders followed. In 1982, Compaq had come out with a transportable personal computer. Although it was the size and weight of a suitcase, it could be carried from place to place. It was not the first portable computer, but the Kaypro best-seller was not IBM-compatible, as it used the CP/M system. IBM followed Compaq’s lead, but its product was a disaster. By the time IBM produced an acceptable transportable computer, the public demanded laptop computers. After further stumbles, IBM produced an acceptable laptop, but by that time the public wanted even smaller notebook computers. It was not until the 1990’s that IBM turned out acceptable versions, but by then its cachet had been lost. Early on, Bill Gates had realized that PCs were only vehicles to run software; software would become the paramount consideration for users. In contrast, IBM thought that the machine itself was central to the sale. Gates knew that in time PC users would educate themselves about software 730

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applications and not require the kind of technical support IBM had provided for mainframe users. IBM talked of the nation becoming computer literate; Gates knew that the trick was to make software so simple such literacy would not be required. Steven Jobs of Apple also had that insight. Even IBM could not provide all the technical support that some users would desire; the trick was to build technical support into the software and make it as simple to use as possible. Given its history and traditions, IBM was unable to accept this truism. Steve Armstrong, a key player in the IBM PC business, noted that the IBM philosophy was that prevailing in PCs would be no different from prevailing in the rest of the computer business. That philosophy was the basis of many of IBM’s problems. The company was comfortable dealing with mainframes and their users, but customers were being drawn to simpler programs and smaller machines. Corporate clients would spend millions of dollars on IBM equipment because, as the saying went, “No one ever got fired for using IBM.” Years later, some writers would reveal the IBM “golden screwdriver,” a good example of the company’s arrogance. A customer would be sold a computer, but IBM would ship a machine twice as powerful as the one requested, with a few lines of software added to block some of its capabilities. Then, when the customer invariably required a faster machine with more memory, an IBM technician would arrive and, with the golden screwdriver, erase the redundant software and make a few other changes. Soon after, the customer would receive a large bill for the improvements. In the early 1980’s, IBM seemed to believe that its magic initials on a machine were worth hundreds or thousands of dollars to writers, students, office managers, and other potential purchasers of PCs. At first, IBM’s reputation did carry the market, but consumers proved to be more informed and perceptive buyers than were corporate purchasing agents who, after all, were not spending their own money. They wanted value, so they learned to shun high-priced IBM PCs and opt for machines from young companies such as Apple and Kaypro, then later Dell, Compaq, and other “clone” manufacturers. Steve Wozniak, an Apple cofounder, once told a reporter that Apple was successful because he and Jobs had never manufactured computers before and so were not encumbered by the kind of ideology that blinded IBM. IBM failed to take advantage of several opportunities. It could have controlled Microsoft, which would have died without IBM’s early patronage. As late as 1986, Gates was willing to sell IBM a major interest in his company. IBM had taken a 20 percent stake in Intel in 1983 and could have expanded that share at will to 30 percent or perhaps more. Lotus and Borland, two software manufacturers, would have gone nowhere without 731

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IBM’s patronage; they too would have sold out to IBM. After dismissal of an antitrust action against IBM in 1981 and given the probusiness stance of the government at the time, IBM might have made these acquisitions with ease and might have been able to maintain control in the computer market. The 1980’s were cluttered with IBM’s lost opportunities. Much of IBM’s failure resulted from a lack of vision. Cary’s successor, John Opel, was the quintessential company man. John Akers followed Opel and resigned in disgrace in 1993. Under Akers, IBM instituted a large-scale layoff program, cut spending and stock dividends, and showed signs of revival in the PC area. By the time Akers left, to be succeeded by Louis Gerstner, the first outsider to head the company, its personal computers and notebook computers were as good as rivals’ machines and priced competitively. IBM remained the industry’s leading company, but the old mystique was gone, possibly forever. The mystique was killed not by Japanese competitors in mainframes, where the challenge seemed to be at the beginning of the 1980’s, but by scores of much smaller American competitors, software companies, and chip manufacturers that became the major forces in this stage of the computer revolution. Unwilling to give up on what was the industry’s fastest-growing segment, in 1990 IBM released the PS/1 line of computers. These quickly gained the reputation of being underpowered and overpriced. The line limped along until early 1993, when IBM gave the division more independence. Now free to experiment and innovate, engineers revamped the PS/1s, and prices were slashed. Sales increased by more than 300 percent within half a year, offering hope that the IBM mystique would return. Bibliography Carroll, Paul. Big Blues: The Unmaking of IBM. New York: Crown, 1993. Carroll covered the IBM story for The Wall Street Journal and based this book on his observations and interviews with IBM rivals, particularly those at Microsoft. The best book on the subject of how IBM’s culture weakened it in the struggle for domination of the industry. Chposky, James, and Ted Leonsis. Blue Magic: The People, Power, and Politics Behind the IBM Personal Computer. New York: Facts on File, 1988. A good chronological study of the making and unmaking of the personal computer project at IBM. A good introduction to the subject. DeLamarter, Richard. Big Blue: IBM’s Use and Abuse of Power. New York: Dodd, Mead, 1986. Written before IBM’s failures were well known. DeLamarter was convinced that IBM had the power to crush all rivals. This book offers insights into how students of the industry misread the signs of failure. 732

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McKenna, Regis. Who’s Afraid of Big Blue? Reading, Mass.: AddisonWesley, 1989. McKenna was one of the first to realize the weaknesses in IBM’s strategies regarding the personal computer. Somewhat dated, but useful. Manes, Stephen, and Paul Andrews. Gates: How Microsoft’s Mogul Reinvented an Industry. New York: Doubleday, 1993. A study of Bill Gates of Microsoft, with an explanation of why the personal computer industry demanded strategy and tactics different from those used by IBM in gaining the lion’s share of the mainframe market. Moritz, Michael. The Little Kingdom: The Private Story of Apple Computer. New York: Morrow, 1984. An early history of Apple Computer. Describes in detail Steve Jobs’s view of the personal computer, different from IBM’s. Pugh, Emerson W. Building IBM: Shaping an Industry and Its Technology. Cambridge, Mass.: MIT Press, 1995. Useful history, both as a case study of IBM and as an overview of the computer industry generally. Contains an extensive bibliography and an index. Rodgers, F. G. The IBM Way: Insights into the World’s Most Successful Marketing Organization. New York: Harper & Row, 1986. Rodgers was a longtime IBM executive, mostly in sales and promotion. In this book, he attempts to explain IBM’s success. Careful readers will realize that he is also explaining weaknesses that would surface in the computer wars. Rose, Frank. West of Eden: The End of Innocence at Apple Computer. New York: Viking, 1989. A detailed account of the computer wars, told from the Apple point of view. An update of the Moritz book, showing how Apple made a series of errors in the fight with IBM. Slater, Robert. Saving Big Blue: Leadership Lessons and Turnaround Tactics of IBM’s Lou Gerstner. New York: McGraw-Hill, 1999. Robert Sobel Cross-References IBM Changes Its Name and Product Line (1924); Jobs and Wozniak Found Apple Computer (1976); Electronic Technology Creates the Possibility of Telecommuting (1980’s); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999); Dow Jones Adds Microsoft and Intel (1999); The Y2K Crisis Finally Arrives (2000).

733

AT&T AGREES TO BE BROKEN UP AS PART OF AN ANTITRUST SETTLEMENT AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement

Category of event: Monopolies and cartels Time: January 8, 1982 Locale: Washington, D.C. An agreement between AT&T and the federal government brought competition to long distance telecommunications and freed AT&T from government regulations concerning its expansion into new areas of business Principal personages: William Saxbe (1916), a former senator from Ohio, responsible for filing the suit against AT&T William F. Baxter (1929-1998), the assistant attorney general in charge of the antitrust division of the Justice Department Harold H. Greene (1923), a judge on the U.S. District Court for the District of Columbia who watched over all aspects of the agreement William J. McGowen (1927), a venture capitalist and early investor in MCI Charles L. Brown (1921), the chief executive officer of AT&T, responsible for changing the company’s course regarding the wisdom of divesting the operating companies Summary of Event On November 20, 1974, the U.S. Department of Justice filed suit against the American Telephone and Telegraph Company (AT&T), alleging that it had monopolized and attempted to monopolize various telecommunica734

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tions markets. The suit asked that Western Electric, AT&T’s manufacturing arm, be divested, along with some or all of the Bell Operating Companies (BOCs). Although some of the charges against AT&T had been made earlier and had been settled in a consent decree in 1956, they had become relevant again because of technological advances achieved in the 1960’s and early 1970’s, coupled with the appearance of a competitor, MCI Communications Corporation, in the business of supplying long distance telecommunications service. MCI had begun as Microwave Communications, Incorporated, a small debt-laden company supplying communications services between Chicago and St. Louis. Soon thereafter, it had solicited and received a capital infusion from William J. McGowen, a venture capitalist. He soon insinuated himself into company leadership and used his position to attack the hitherto impregnable AT&T. The upstart company quickly expanded its horizons and despite its heavy debt load was able to make inroads into AT&T’s monopoly position in the field of long distance communications. Led by McGowen, MCI quickly became a scourge of “Ma Bell,” filing antitrust suits alleging monopolization while at the same time attempting to extend its services to cover the most lucrative markets. This became known as “skimming the cream.” As MCI’s success became evident, other companies joined the fray. Regulated by the Federal Communications Commission (FCC), AT&T was unable to protect itself from such incursions. Its rates were set; it could not offer discounts in response to the lower charges of the new competitors. At first, the progress of the government’s antitrust case appeared to parallel that of the action against International Business Machines Corporation, as the health of the presiding judge, Joseph Waddy, steadily deteriorated. The situation quickly changed with the appointment of his replacement, activist Harold H. Greene, who was determined that there be no further unnecessary delays in reaching a settlement—preferably one that was court adjudicated. Scheduling the trial to begin on January 15, 1981, he allowed a brief window of time for appointees in the new administration of President Ronald Reagan to have input in attempting to work out a consent decree along lines suggested by the outgoing negotiators, led by Assistant Attorney General Sanford Litvack. When the two sides were unable to come to an agreement, the trial began. The new assistant attorney general in charge of the antitrust division, William F. Baxter, was interested in reaching a settlement, but upon different grounds. Instead of seeking a piecemeal divestiture, he wanted to split the regulated parts of AT&T from those endeavors that were unregulated. That way, there would be no possibility of “cross-subsidization,” in which 735

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the regulated portions might subsidize initiatives in the competitive arena. Any other type of solution would be punitive and, as he stated, “lacking in theory.” Within a surprisingly short period of time, the government and the telecommunications giant reached a consent agreement that included the divestiture of all the BOCs but not any manufacturing or research facilities. Further, the BOCs were to provide local, and not long distance, service. In return, the 1956 consent decree prohibition on AT&T against involvement in nontelecommunications endeavors was removed, allowing it to expand into the computer business. Although the agreement was framed as a modification of the 1956 decree, Judge Greene empowered himself to rule on subsequent changes. The agreement was reached on January 8, 1982, but Greene did not approve it until August, after some modifications had been made. As a result of the agreement, AT&T was to divest itself of seven distinct corporate entities comprising all of its local operations throughout the United States. These companies and their areas of operation were Nynex Corporation, New York and New England; Bell Atlantic Corporation, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, West Virginia, and the District of Columbia; BellSouth Corporation, Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North and South Carolina, and Tennessee; American Information Technologies Corporation (Ameritech), Illinois, Indiana, Michigan, Ohio, and Wisconsin; Southwestern Bell Corporation, Arkansas, Kansas, Missouri, Oklahoma, and Texas; U.S. West, Incorporated, Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North and South Dakota, Oregon, Utah, Washington, and Wyoming; and Pacific Telesis Group, California and Nevada. Some of these companies adopted names describing the location of their primary service interest; others were more imaginative and tried to project a forwardlooking image. New York and New England Telephone added an “x” to the initial letters of its service area to become Nynex; “telesis” means intelligently managed progress. Impact of Event On January 1, 1984, AT&T ceased offering local service. The responsibility for this class of service was transferred to the successor companies listed above. AT&T continued to offer long distance service, but now consumers had choices of other long distance carriers. In addition to AT&T, entities such as MCI, Sprint, and Rochester Telephone offered long distance service. Each user had the option of choosing a primary long distance provider. No one picking up a telephone receiver would have been able to 736

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detect any difference in service. Not every area was directly affected. Other independent operating companies, such as General Telephone and Electronics, Rochester Telephone, and independent Bell companies, continued to serve their territories as before. Their customers would shortly gain similar opportunities to choose among long distance carriers. When AT&T was providing all services, costs were not equally apportioned. Long distance service had subsidized local service, and benefits to consumers such as information operators had been supported by cashgenerating sources. With the advent of competition in the long distance market, it was no longer possible to cross-subsidize other services. Everything had to be on a pay-as-you-go basis; the cost of local calls therefore rose relative to other charges. Ironically, the government decree precluded AT&T from continuing a progressive rate structure. Low-income people place more local calls relative to long distance than do high-income people, and as a result their expenditures rose while those of the more wealthy declined as competition among providers forced long distance rates to fall. There were minor growing pains as the seven divested companies were forced to work out various unexpected complications. Nevertheless, compared to some of the difficulties experienced in the late 1970’s by AT&T, and especially taking into account the immensity of the reorganization of the entire telecommunications system, the troubles were small and quickly overcome. Each of the BOCs quickly set out to establish its own identity by concentrating on certain areas. Several became involved in cable television, and all came to have interests in cellular telephony. They were enjoined, however, from such activities within the geographic area of their regulated endeavors. Some of the BOCs invested in foreign telecommunications systems. Bell Atlantic, BellSouth, and Pacific Telesis established office equipment sales and leasing subsidiaries. Of all the BOCs, Southwestern Bell expanded the most broadly. It bought an interest in a local professional basketball team, the San Antonio Spurs, and also became deeply involved in publishing, attempting to expand upon its highly profitable Yellow Pages franchise. All the BOCs began to seek ways to escape from some of the strictures imposed on them by the settlement. Pacific Telesis has been the most innovative, planning to split itself into two separate parts, replicating the philosophy behind the 1982 agreement. Many of the unregulated tasks would be transferred to the new entity, while the regulated operations would remain with the slimmed down operating company. Perhaps the biggest corporate change took place at AT&T. Freed from the shackles of the 1956 decree, it was able to expand into all aspects of the computer industry. Not only did it begin the manufacture of computers themselves, but it also became involved in software and network design. 737

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Despite the intensity of its efforts, however, the company was not able to become the market force that it wished until its daring takeover of NCR Corporation, a leader in the industry. Early results indicated that the amalgamation was a success. As the telecommunication needs of the United States and the rest of the world become more sophisticated, technology involving computers will be inexorably involved, making the NCR takeover appear to be a logical move. The changes in corporate structure since the breakup were matched by the variety of options offered to telephone users. Vigorous competition occurred in pricing and services. Each of the long distance providers endeavored to persuade callers to use its system. They resorted to various pricing strategies, heavy advertising, and various incentives in the struggle. This price and service competition benefited consumers. On the negative side, many consumers complained of being switched to new companies against their will. Overzealous salespeople were found to be making unauthorized service changes. The evolution of the telecommunications industry is by no means complete. Competition may emerge on the local level as technology makes it possible to bypass the local service provider. In this scenario, local “MCIlike” companies would compete for local service in specific areas. As of 1993, one of the independents, Rochester Telephone, already had decided to split itself into two parts so as to be able to benefit from this possibility. It was likely that at least one of the BOCs would follow suit. The Pacific Telesis plan may well be amended to achieve this end. In the field of cellular communications, it is very easy to bypass the local BOC. AT&T acquired a large stake in McCaw Cellular, a leading provider of this type of service. Almost immediately, the BOCs protested that the transaction violated the 1982 agreement, which precluded AT&T’s involvement in local service. The telecommunications industry is still growing and evolving. It is impossible to predict the direction that the industry will take, but it is clear that the breakup of AT&T and emergence of competitors set the stage for service far different from and much more flexible than that offered prior to the breakup. Bibliography Allen, Robert E. When the Whole Becomes Less than the Sum of Its Parts: The Story Behind the AT&T Breakup. St. Louis, Mo.: Center for the Study of American Business, Washington University, 1996. Brief paper on the effects of the breakup of AT&T. Coll, Steve. The Deal of the Century: The Breakup of AT&T. New York: Atheneum, 1986. A popularly oriented—bordering on the sensational— treatment of the story. 738

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Henck, Fred W., and Bernard Strassburg. A Slippery Slope: The Long Road to the Breakup of AT&T. Westport, Conn.: Greenwood Press, 1988. Offers a very good treatment of the activities of the various regulatory bodies prior to the breakup. Kahaner, Larry. On the Line: The Men of MCI—Who Took on AT&T, Risked Everything, and Won! New York: Warner Books, 1986. A good popular history that provides a fine treatment of the early years of MCI. Kovaleff, Theodore P. “For Whom Did the Bell Toll? A Review of Recent Treatments of the American Telephone and Telegraph Divestiture.” The Antitrust Bulletin 34 (Spring, 1989): 437-450. A bibliographical essay on the subject. Krauss, Constantine Raymond, and Alfred W. Duerig. The Rape of Ma Bell: The Criminal Wrecking of the Best Telephone System in the World. Secaucus, N.J.: Lyle Stuart, 1988. A poorly written and extremely partisan treatment of the topic. Peritz, Rudolph J., Jr. Competition Policy in America, 1888-1992: History, Rhetoric, Law. New York: Oxford University Press, 1996. History of federal government policies relating to antitrust issues. Includes a substantial bibliography and index. Stone, Alan. Wrong Number: The Breakup of AT&T. New York: Basic Books, 1989. An attempt to explain the rationale for breaking up the company. Stone gives good insights into the intricacies of regulatory politics. Temin, Peter, and Louis Galambos. The Fall of the Bell System: A Study in Prices and Politics. New York: Cambridge University Press, 1987. The definitive work on the background to the AT&T breakup. Theodore P. Kovaleff Cross-References Congress Passes the Clayton Antitrust Act (1914); Congress Establishes the Federal Communications Commission (1934); AT&T and GTE Install Fiber-Optic Telephone Systems (1977); Federal Court Rules That Microsoft Should Be Split into Two Companies (2000).

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COMPACT DISCS REACH THE MARKET Compact Discs Reach the Market

Category of event: New products Time: 1983 Locale: Worldwide The introduction of the compact disc opened a new era in sound recording and revitalized the recording industry Principal personages: Akio Morita (1921-1999), a Japanese physicist and engineer who was a cofounder of Sony Wisse Dekker (1924), a Dutch businessman who led the Philips company W. R. Bennett (1904-1983), an American engineer who was a pioneer in digital communications and who played an important part in the Bell Laboratories research program Summary of Event The digital system of sound recording, like the analog methods that preceded it, was developed by the telephone companies to improve the quality and speed of telephone transmissions. The system of electrical recording introduced by Bell Laboratories in the 1920’s was part of this effort. Even Edison’s famous invention of the phonograph in 1877 was originally conceived as an accompaniment to the telephone. Although developed within the framework of telephone communications, these innovations found wide application in the entertainment industry. The basis of the digital recording was a technique of sampling the electrical waveforms of sound called PCM, or Pulse Code Modulation. PCM measures the characteristics of these waves and converts them into numbers. This technique was developed at Bell Laboratories in the 1930’s 740

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to transmit speech. At the end of World War II, engineers of the Bell System began to adapt PCM technology for ordinary telephone communications. The problem of turning sound waves into numbers was that of finding a method that could quickly and reliably manipulate millions of them. The answer to this problem was found in electronic computers, which used binary code to handle millions of computations in a few seconds. The rapid advance of computer technology and the semiconductor circuits that gave computers the power to handle complex calculations provided the means to bring digital sound technology into commercial use. In the 1960’s, digital transmission and switching systems were introduced to the telephone network. Pulse coded modulation of audio signals into digital code achieved standards of reproduction that exceeded even the best analog system, creating an enormous dynamic range of sounds with no distortion or background noise. The importance of digital recording went beyond the transmission of sound because it could be applied to all types of magnetic recording in which the source signal is transformed into an electric current. There were numerous commercial applications for such a system, and several companies began to explore the possibilities of digital recording in the 1970’s. Researchers at the Sony, Matsushita, and Mitsubishi electronics companies in Japan produced experimental digital recording systems. Each developed its own PCM processor, an integrated circuit that changes audio signals into digital code. It does not continuously transform sound but instead samples it by analyzing thousands of minute slices of it per second. Sony’s PCM-F1 was the first analog-to-digital conversion chip to be produced. This gave Sony a lead in the research into and development of digital recording. All three companies had strong interests in both audio and video electronics equipment and saw digital recording as a key technology because it could deal with both types of information simultaneously. They devised recorders for use in their manufacturing operations. After using PCM techniques to turn sound into digital code, they recorded this information onto tape, using not magnetic audio tape but the more advanced video tape, which could handle much more information. The experiments with digital recording occurred simultaneously with the accelerated development of video recording technology and owed much to the enhanced capabilities of video recorders. At this time, videocassette recorders were being developed in several corporate laboratories in Japan and Europe. The Sony Corporation was one of the companies developing video recorders at this time. Its U-matic machines were successfully used to record digitally. In 1972, the 741

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Nippon Columbia Company began to make its master recordings digitally on an Ampex video recording machine. There were powerful links between the new sound recording systems and the emerging technologies of storing and retrieving video images. The television had proved to be the most widely used and profitable electronic product of the 1950’s, but with the market for color television saturated by the end of the 1960’s, manufacturers had to look for a replacement product. A machine to save and replay television images was seen as the ideal companion to the family TV set. The great consumer electronics companies—General Electric and RCA in the United States, Philips and Telefunken in Europe, and Sony and Matsushita in Japan—began experimental programs to find a way to save video images. RCA’s experimental teams took the lead in developing an optical videodisc system, called Selectavision, that used an electronic stylus to read changes in capacitance on the disc. The greatest challenge to them came from the Philips company of Holland. Its optical videodisc used a laser beam to read information on a revolving disc, in which a layer of plastic contained coded information. With the aid of the engineering department of the Deutsche Grammophon record company, Philips had an experimental laser disc in hand by 1964. The Philips Laservison videodisc was not a commercial success, but it carried forward an important idea. The research and engineering work carried out in the laboratories at Eindhoven in Holland proved that the laser reader could do the job. More important, Philips engineers had found that this fragile device could be mass produced as a cheap and reliable component of a commercial product. The laser optical decoder was applied to reading the binary codes of digital sound. By the end of the 1970’s, Philips engineers had produced a working system. Ten years of experimental work on the Laservision system proved to be a valuable investment for the Philips Corporation. Around 1979, it started to work on a digital audio disc (DAD) playback system. This involved more than the basic idea of converting the output of the PCM conversion chip onto a disc. The lines of pits on the compact disc carry a great amount of information: the left- and right-hand tracks of the stereo system are identified, and a sequence of pits also controls the motor speed and corrects any error in the laser reading of the binary codes. This research was carried out jointly with the Sony Corporation of Japan, which had produced a superior method of encoding digital sound with its PCM chips. The binary codes that carried the information were manipulated by Sony’s sixteen-bit microprocessor. Its PCM chip for analog-to-digital conversion was also employed. Together, Philips and Sony produced a 742

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commercial digital playback record that they named the compact disc. The name is significant, as it does more than indicate the size of the disc—it indicates family ties with the highly successful compact cassette. Philips and Sony had already worked to establish this standard in the magnetic tape format and aimed to make their compact disc the standard for digital sound reproduction. Philips and Sony began to demonstrate their compact digital disc (CD) system to representatives of the audio industry in 1981. They were not alone in digital recording. The Japanese Victor Company, a subsidiary of Matsushita, had developed a version of digital recording from its VHD video disc design. It was called Audio High Density Disc (AHD). Instead of the small CD disc, the AHD system used a ten-inch vinyl disc. Each digital recording system used a different PCM chip with a different rate of sampling the audio signal. The recording and electronics industries’ decision to standardize on the Philips/Sony CD system was therefore a major victory for these companies and an important event in the digital era of sound recording. Sony had found out the hard way that the technical performance of an innovation is irrelevant when compared with the politics of turning it into an industrywide standard. Although the pioneer in videocassette recorders, Sony had been beaten by its rival, Matsushita, in establishing the video recording standard. This mistake was not repeated in the digital standards negotiations, and many companies were convinced to license the new technology. In 1982, the technology was announced to the public. The following year, the compact disc was on the market. Impact of Event The compact disc represented the apex of recorded sound technology. Simply put, here at last was a system of recording in which there was no extraneous noise—no surface noise of scratches and pops, no tape hiss, no background hum—and no damage was done to the recording as it was played. In principle, a digital recording will last forever, and each play will sound as pure as the first. The compact disc could also play much longer than the vinyl record or long-playing cassette tape. Despite these obvious technical advantages, the commercial success of digital recording was not ensured. Several other advanced systems had not fared well in the marketplace, and the conspicuous failure of quadrophonic sound in the 1970’s had not been forgotten within the industry of recorded sound. Historically, there were two key factors in the rapid acceptance of a new system of sound recording and reproduction: a library of prerecorded music to tempt the listener into adopting the system and a continual 743

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decrease in the price of the playing units to bring them within the budgets of more buyers. By 1984, about a thousand titles were available on compact disc in the United States; that number had doubled by 1985. Although many of these selections were classical music—it was naturally assumed that audiophiles would be the first to buy digital equipment—popular music was well represented. The first CD available for purchase was an album by popular entertainer Billy Joel. The first CD-playing units cost more than $1,000, but Akio Morita of Sony was determined that the company would reduce the price of players even if it meant selling them below cost. Sony’s audio engineering department improved the performance of the players while reducing size and cost. By 1984, Sony had a small CD unit on the market for $300. Several of Sony’s competitors, including Matsushita, had followed its lead into digital reproduction. Several compact disc players were available in 1985 for less than $500. Sony quickly applied digital technology to the popular personal stereo and to automobile sound systems. Sales of CD units increased roughly tenfold from 1983 to 1985. When the compact disc was announced in 1982, the vinyl record was the leading form of recorded sound, with 273 million units sold annually compared to 125 million prerecorded cassette tapes. The compact disc sold slowly, beginning with 800,000 units shipped in 1983 and rising to 53

Among the important products made possible by compact disc technology are CD-ROM drives that enable computer users to access large volumes of program software, sound and image files, and other information from compact and inexpensive disks. (PhotoDisc)

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million in 1986. By that time, the cassette tape had taken the lead, with slightly fewer than 350 million units. The vinyl record was in decline, with only about 110 million units shipped. Compact discs first outsold vinyl records in 1988. In the ten years from 1979 to 1988, the sales of vinyl records dropped nearly 80 percent. In 1989, CDs accounted for more than 286 million sales, but cassettes still led the field with total sales of 446 million. The compact disc finally passed the cassette in total sales in 1992, when more than 300 million CDs were shipped, an increase of 22 percent over the figure for 1991. The introduction of digital recording had an invigorating effect on the recorded sound industry, which had been unable to fully recover from the slump of the late 1970’s. Sales of recorded music had stagnated in the early 1980’s, and an industry accustomed to steady increases in output became eager to find a new product or style of music to boost its sales. The compact disc was the product to revitalize the markets for both recordings and players. During the 1980’s, worldwide sales of recorded music jumped from $12 billion to $22 billion, with about half of the sales volume accounted for by digital recordings by the end of the decade. The success of digital recording served in the long run to undermine the commercial viability of the compact disc. This was a play-only technology, like the vinyl record before it. Once users had become accustomed to the pristine digital sound, they clamored for digital recording capability. The alliance of Sony and Philips broke down in the search for a digital tape technology for home use. Sony produced a digital tape system called DAT, while Philips responded with a digital version of its compact audio tape called DCC. Sony answered the challenge of DCC with its Mini Disc (MD) product, which can record and replay digitally. The versatility of digital recording has opened up a wide range of consumer products. Compact disc technology has been incorporated into the computer, in which CD-ROM readers convert the digital code of the disc into sound and images. Many home computers have the capability to record and replay sound digitally. Digital recording is the basis for interactive audio/video computer programs in which the user can interface with recorded sound and images. Philips has established a strong foothold in interactive digital technology with its CD-I (compact disc interactive) system, which was introduced in 1990. This acts as a multimedia entertainer, providing sound, moving images, games, and interactive sound and image publications such as encyclopedias. The future of digital recording will be broad-based systems that can record and replay a wide variety of sounds and images and that can be manipulated by users of home computers. 745

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Bibliography AT&T Bell Laboratories. A History of Engineering and Science in the Bell System: Communications Sciences (1925-1980). New York: Author, 1984. A thorough account of the early research in digital recording, from the viewpoint of Bell Laboratories. Although often highly technical, this is the most comprehensive account of the history of this technology. Copeland, Peter. Sound Recordings. London: British Library, 1991. An up-to-date account of the development of sound recording technology. Covers the research into and introduction of digital recording. Written for the layperson, with some useful illustrations. Graham, Margaret B. RCA and the VideoDisc. New York: Cambridge University Press, 1986. A scholarly account of the research into video digital technology, also covering the competition of several leading international companies and their race to develop a new line of electronics products. Morita, Akio, Edwin Reingold, and Mitsuko Shimomura. Made in Japan: Akio Morita and Sony. New York: Dutton, 1986. A personal account of the history of the Sony Corporation from the end of World War II to the 1980’s. Includes Morita’s account of the development of digital recording. Nathan, John. Sony: The Private Life. Boston: Houghton Mifflin, 1999. Study of the inner workings of the giant corporation. Schlender, Brenton R. “How Sony Keeps the Magic Going.” Fortune 125 (February 24, 1992): 81. An overview of the Sony Corporation, with an emphasis on its latest products based on digital technology. Provides information about the corporate culture and its style of research and development. Andre Millard Cross-References IBM Introduces Its Personal Computer (1981); Sony Purchases Columbia Pictures (1989); Cable Television Rises to Challenge Network Television (mid-1990’s); Dow Jones Adds Microsoft and Intel (1999).

746

FIREFIGHTERS V. STOTTS UPHOLDS SENIORITY SYSTEMS FIREFIGHT ERS V. STO TTS Upholds Seniority Systems

Category of event: Labor Time: June 12, 1984 Locale: Memphis, Tennessee, and Washington, D.C. The U.S. Supreme Court ruled that labor agreements could use seniority as a criterion for layoffs even when that use would oppose the goals of affirmative action programs Principal personages: Carl Stotts, a black firefighting captain in Memphis Byron White (1917), the U.S. Supreme Court justice who delivered the decision Harry Blackmun (1908-1999), a dissenting Supreme Court justice Lyndon B. Johnson (1908-1973), the U.S. president who urged passage of the 1964 Civil Rights Act Emanuel Celler (1888-1981), a New York congressman who supported Title VII of the 1964 Civil Rights Act Everett Dirksen (1896-1969), an Illinois senator who questioned provisions of the 1964 Civil Rights Act Potter Stewart (1915-1985), a Supreme Court justice who upheld seniority systems in a 1977 decision Summary of Event Reflecting broad public concerns and controversies about a gamut of civil liberties, a combination of liberals and conservatives in Congress, goaded by President Lyndon B. Johnson, fought for passage of the 1964 Civil Rights Act. Title VII of the act delineated a series of formal and 747

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informal remedial procedures designed to end employment discrimination based on race, color, religion, sex, or national origin. The objective of Title VII was to pave the way for equal employment opportunity for all Americans. Ultimately, the constitutionality of the act’s major sections would be tested by the U.S. Supreme Court as litigation relating to the act reached the Court on appeal or came to the justices for review. While Earl Warren was chief justice of the United States (1953-1969), the Court gave expansive interpretations to a wide range of civil liberties. The Court’s decisions in these cases, as was frequently noted, often amounted to additional “legislation.” In regard to labor law, decisions of the Warren Court were characterized by their focus on intergovernmental relationships. It found few occasions to define the rights of individuals in the workplace and no occasions to strike down employment discrimination based on sex. Beginning in 1969, those two tasks were undertaken by the Court under Earl Warren’s successor, Warren E. Burger, despite pundits’ predictions that Burger would lead a conservative reaction in the field of civil rights. On the contrary, the Burger Court broke new ground in labor law by delineating the rights of individuals in the workplace, often in the light of provisions of the 1964 Civil Rights Act. It was in this context that the case of Firefighters Local Union No. 1784 v. Stotts et al. came to argument before the Court on December 6, 1983. The case questioned the legality of using job seniority as a criterion for layoffs. As legal scholars noted, along with issues associated with affirmative action and so-called “reverse discrimination,” seniority problems were among the most sensitive and bitterly contested in the realm of antidiscrimination legislation embodied in provisions of Title VII of the 1964 Civil Rights Act. Moreover, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), which had played a major role in mustering political support for passage of the 1964 act, had battled consistently to preserve the integrity of seniority systems. Black workers, notoriously among those “last hired and first fired,” however, perceived established seniority systems as additional racial roadblocks to their advancement and job security. Carl Stotts, a black captain in the Memphis, Tennessee, fire department, joined others in a class action suit invoking Title VII of the 1964 Civil Rights Act. They alleged that city officials displayed a pattern of racial discrimination in their hiring and promotion practices in the fire department. Entering a consent decree with the courts, the city accordingly evinced its willingness to reform the department’s hiring and promotion policies, but broader considerations intervened. Fiscal difficulties soon thereafter required a budget reduction that, in turn, meant employee layoffs. 748

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At this juncture, a district court prohibited the city from following its seniority system in effecting the layoffs on grounds that proposed reductions would have a racially discriminatory effect. Modifications in the city’s system thereafter resulted in the layoffs of white employees who had more seniority than black employees who were retained, in compliance with the district court’s wishes. The district court was following what it believed to be the direction confirmed by many lower court rulings, namely that established seniority systems must be struck down if they perpetuated the effects of past discrimination, regardless of whether these systems had been designed to discriminate intentionally. This line of ruling obviously contradicted the intent of Congress. In enacting the 1964 Civil Rights Act, Congress, under pressure from the AFL-CIO and other organizations, had made every effort to ensure that Title VII would in no way upset established seniority plans. Nevertheless, grudgingly and at considerable expense, unions and management thereafter were forced to comply with court rulings or face costly litigation. In 1977, this situation was reversed by the Supreme Court’s decision, drafted by Justice Potter Stewart, in Teamsters v. United States. Stewart, returning to what he believed to be the intent of Congress, declared that bona fide seniority plans, even if discriminatory in their past or present effects, were immunized by provisions of Title VII, specifically its Section 703(h). Such was the situation when Justice Byron White delivered the heart of the Firefighters decision, namely, that the district court had erred in mandating that white employees be laid off by the City of Memphis when otherwise its established seniority system would have called for the layoff of black employees with less seniority. Justice White, noting the Teamsters ruling, declared that Section 703(h) permitted “the routine application of a seniority system absent proof of an intention to discriminate.” Memphis had, in White’s estimate, a bona fide seniority system before the district court ruled and the consent decree causing modification in the city’s plan went into effect. Section 703(h) seemed clear enough to him in declaring it legal employment practice for an employer “to apply different standards of compensation, or different terms, conditions, or privileges of employment” in establishing or maintaining a “bona fide seniority or merit system,” provided these differences were not the result of intentional discrimination based on race, color, sex, religion, or national origin. Seniority systems had been cherished by labor because they provided objective standards for what otherwise might have been arbitrariness or favoritism on the part of management or unions in respect to job security. 749

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The Firefighters decision reinforced seniority systems even if they adversely affected minority groups. Impact of Event The so-called “White Rule,” announced by Justice Byron White in 1984, in practice meant that a bona fide seniority plan could not cause white workers to be laid off ahead of black workers with less seniority. This left Memphis’ new affirmative action employees, all black, at the same risk of layoffs as all other workers. Thus affirmative action plans could prevent some whites from being hired, but they could not cause them to be fired. From the perspectives of black leaders and black workers, the rule perpetuated workplace policies that had placed them in the position of being the last hired and the first fired. It mattered little that such was not the intent of Justice White. In 1986, although the specifics of the litigation differed from those in Firefighters, White cast a deciding vote reinforcing his views in Wygant v. Jackson Board of Education. A Jackson, Mississippi, school board and the Jackson Teachers Union had signed an agreement designed to prevent minority teachers hired under affirmative action plans from being laid off. The agreement stipulated that the minority teachers were to be protected even if tenured white teachers had to be laid off. White’s ruling treated the results of the Jackson affirmative action plan as reverse discrimination. White teachers were being fired because of their race, and in his view no affirmative action scheme justified that result. The decisions handed down by White and the Court’s majority in conflicts arising between seniority plans and affirmative action policies from 1977 to 1986 represented an effort to reflect more accurately the intent of Congress in its enactment of the 1964 Civil Rights Act and the drafting of Title VII. Without directly overruling the Court’s earlier decision in Griggs v. Duke Power Company (1971), a landmark adverse impact case that prohibited even unintentional discrimination, the Court had narrowed its interpretations of what constituted discrimination. During the quarter century after passage of the 1964 Civil Rights Act, a number of important changes occurred in the business world, in organized labor, and in congressional attitudes. For example, caught between officially divergent interpretations of what constituted discrimination—that is, determinations of the will of Congress on one hand and Supreme Court decisions on the other—many of the nation’s leading business interests and institutions receiving federal or state funds had begun implementing voluntary affirmative action plans. In some instances, these voluntary plans were structured around implicit “quotas” to be used in guiding minority hiring. Moreover, businesses’ incentive to comply with nondiscriminatory prac750

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tices was inspired less by fear of traditional collective bargaining with trade unions than it was by threats posed by potential suits filed by the Equal Employment Opportunity Commission (EEOC), by feminist groups, by civil rights organizations, by consumers’ groups, and by the alleged victims of discrimination. In addition, trade unionism of the traditional kind, which had fought for and won great gains for manufacturing and assembly line workers from the 1930’s until the early 1950’s, was dying. A new unionism was supplanting it. Because of rapid technological change and the diminishing importance of manufacturing in the American economy, the new unionism was heavily influenced by new breeds of workers. Among them were semiprofessional and white collar workers, who by 1980 accounted for more than half of the labor force, as well as rapidly expanding contingents of service workers. In addition, at the close of the 1980’s more than half of all employees were women, most of whom were keenly aware of previous and present sex discrimination. Most semiprofessional and white collar workers were inclined to downplay the significance of seniority systems in regard to hiring, pay, promotions, retirement, and layoffs. Instead, in regard to these matters they favored the application of merit principles. Structural and attitudinal changes such as these that developed through the 1970’s and 1980’s, as well as the direction taken by the Supreme Court between the Griggs decision and the ruling in Firefighters, led Congress to enact the Civil Rights Act of 1991. This new act followed the Court’s ruling in Ward’s Cove Packing Co. v. Atonio in 1989. The decision basically overruled Griggs, rejecting “business necessity” as the sole criterion justifying the maintenance of practices that had a disparate impact, that is, that were discriminatory. The Court lamented the fact that any employer with a racially imbalanced work force was likely to be hailed into court and forced to engage in costly and time-consuming defense of employment methods. Further, the Court recognized that the sole option available to employers was the adoption of racial quotas. In the spirit of the Firefighters decision, the Court held that constraining employers to move to this option was never intended by Congress in Title VII of the 1964 Civil Rights Act. By 1991, congressional majorities viewed matters differently. Although the 1991 Civil Rights Act made no mention of quotas, it did nothing to curtail employer incentives to engage in race-conscious hiring; in fact, it encouraged the adoption of implicit quotas. The act of 1991 expanded the antidiscrimination interpretations of Griggs and broadened the scope of compensatory damages that could be collected by proven victims of discrimination. Employers could defend themselves against charges of discrimination by proving that their practices rested upon “business necessity.” 751

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Complainants bore the burden of proving that each particular challenged practice caused a disparate impact. The act likewise weakened the Firefighters decision by expanding rights to challenge discriminatory seniority systems. As Congress and the Supreme Court pursued different and often confusing paths in seeking to end discrimination with justice to all, some civil libertarians opined that civil rights acts had become the major threat to civil rights, while others denounced them for having achieved too little. Bibliography Epstein, Richard A. Forbidden Grounds: The Case Against Employment Discrimination Laws. Cambridge, Mass.: Harvard University Press, 1992. Scholarly evaluation of the substance and consequences of modern civil rights legislation and court decisions. Best in its field for a critical survey by a civil rights expert. Informative page notes, appendices, table of cases, extensive index. Gould, William B. IV. Agenda for Reform: The Future of Employment Relationships and the Law. Cambridge, Mass.: MIT Press, 1993. Excellent, clear, and scholarly. Chapter 3 deals with the history of job security and seniority. Later chapters deal with racial and other forms of discrimination. Chapter 8 is a fine discussion of the 1991 Civil Rights Act, race, and discrimination. Hacker, Andrew. Two Nations: Black and White, Separate, Hostile, Unequal. New York: Scribner’s, 1992. A reflective, substantive analysis of the subject, including conflicts in the workplace over seniority and many other issues involved in discrimination. Offers a depressing picture, although critical balance is maintained. Hall, Kermit L., ed. The Oxford Guide to United States Supreme Court Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Heckscher, Charles C. The New Unionism: Employee Involvement in the Changing Corporation. New York: Basic Books, 1988. Extremely interesting and essential in taking account of changes in employee values, rights, organization, and relations with corporate employers. McWhirter, Darien A. Your Rights at Work. New York: John Wiley & Sons, 1989. A crisp, reasonably accurate guide to civil rights as related to the workplace. Heavily based on court decisions. Well done, informative, and helpful. Zimmer, Michael J. Cases and Materials on Employment Discrimation. 4th ed. New York: Aspen Law & Business, 1997. Clifton K. Yearley 752

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Cross-References The Wagner Act Promotes Union Organization (1935); Roosevelt Signs the Fair Labor Standards Act (1938); The Taft-Hartley Act Passes over Truman’s Veto (1947); The Civil Rights Act Prohibits Discrimination in Employment (1964); The Supreme Court Orders the End of Discrimination in Hiring, (1971); The Pregnancy Discrimination Act Extends Employment Rights (1978); The Supreme Court Rules on Affirmative Action Programs (1979); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986).

753

HOME SHOPPING SERVICE IS OFFERED ON CABLE TELEVISION Home Shopping Service Is Offered on Cable Television

Category of event: Marketing Time: July 1, 1985 Locale: Clearwater, Florida The Home Shopping Network offered television viewers the convenience of shopping from their own homes for a variety of products Principal personages: Lowell W. “Bud” Paxson (1935), the founder and president of Home Shopping Network Roy Speer (1932), the first chairman of Home Shopping Network Irwin Jacobs (1941), the majority shareholder in COMB (CloseOut Merchandise Buyers) Summary of Event The advent of home shopping services was a watershed event in the history of marketing in the United States. The first such service at the national level was offered by Home Shopping Network (HSN) on July 1, 1985. The popularity of this concept has grown impressively since. Lowell W. “Bud” Paxson, the founder and president of HSN, entered the business of home shopping almost by accident. As the owner of an AM radio station in Dunedin, a small town on the west coast of Florida, Paxson was faced with decreasing revenues at a time when popular stations were converting from AM to FM broadcast formats. One of Paxson’s clients settled his advertising bills with some merchandise in lieu of money. Paxson attempted to sell this merchandise in a radio broadcast, at prices far below regular retail prices. Positive response from listeners helped this type of 754

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radio show evolve into a regular daily feature on Paxson’s station. In a typical show, the sale merchandise was described, and interested customers would call the station later to conclude sales transactions. Encouraged by the success of the radio shopping concept, Paxson extended it to cable television in July, 1982. Paxson’s cable television channel 52, located in Clearwater, Florida, offered everything from $2 household items to expensive cruise vacations to viewers in two neighboring counties. This teleshopping service registered substantial growth. By the end of its third year, it was generating 190,000 orders a month from 130,000 members. The success of this local-level television-based shopping approach encouraged Paxson to launch the national-level HSN, a live cablecast show that operated continuously. This show sold merchandise acquired in bulk from closeouts, bankruptcies, and liquidation sales. The strategy enabled HSN to use a value-based selling theme to attract customers by offering products at discounted prices. Initially, this cable network covered 462 multiple systems operators (MSOs) in the cable industry, representing five million homes. HSN paid 5 percent of sales generated to the MSOs as compensation for providing access to cable media. At the outset, HSN employed ten on-air hosts, with each host working a shift of two to three hours. The host typically offered only one item for sale at a time and presented a persuasive sales pitch. Because shoppers did not have advance knowledge about when a particular product or type of product might be offered for sale, and because any product’s sale offer was limited to the short interval (usually ten minutes) it was shown on television, home shopping was potentially an addictive experience for consumers in search of bargains. Viewers were encouraged to call a toll-free telephone number immediately to purchase the currently displayed item. First-time shoppers were given a $5 incentive to become members of the Home Shopping Club, which would assign them unique identification numbers on HSN’s computer. These numbers facilitated quick subsequent sales transactions, circumventing the need for shoppers to convey detailed shipping instructions each time they shopped. HSN’s venture into cablecast shopping was very successful. In its first eight months of operation, HSN generated $63.9 million in revenues and $6.8 million in profits. These impressive results were well received by stock investors. When the company went public in May, 1986, at $18 a share, its stock rose almost immediately to $42 and stabilized in the following months around $75. Paxson and Richard Speer, chairman of HSN, owned most of the HSN stock. For a variety of reasons, HSN achieved notable success in an area in 755

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which several earlier ventures had obtained less than spectacular results. First, unlike HSN, many of the shows launched in the 1980’s operated for a relatively short duration. For example, the Home Shopping Show on Modern Satellite Network ran for a half hour, five times a week. Such shows failed to provide the “anytime shopping” convenience of HSN. Second, some of HSN’s predecessors and local-level competitors did not sell merchandise at discount prices. Viewers may not have perceived any “value” advantage in such home shopping outlets. Third, HSN’s format was the closest to interactive television-based shopping and facilitated objective information search on products. HSN shoppers could speak to the on-air host directly on the telephone and get ready answers to any specific product-related questions before making a purchase decision. A caller might ask the host, “What does the back of that belt look like?” and obtain an immediate audiovisual response on the television screen. In contrast, the only other teleshopping mode to offer anything approaching interactive at-home shopping was Cableshop, a joint venture of the Adams-Russell cable system and Soskin-Thompson Associates, a direct marketing subsidiary of the J. Walter Thompson advertising agency. Cableshop was a “videoon-demand” advertising service, as opposed to a live or scheduled shopping program. Shoppers first had to access a directory channel to choose specific advertising messages that interested them. They could later view these messages, specially prepared for the Cableshop service, after making a telephone request. A disadvantage was that viewers had to wait several minutes for a message to appear after making a request, a factor that could have discouraged extensive use of this home shopping service. Finally, HSN aggressively sought to maintain shopper loyalty and interest with various promotional devices. These included sending anniversary and birthday cards to members of the Home Shopping Club, sweepstakes with attractive prizes, trivia contests, crossword puzzle games, and a magazine called Bargaineer. In addition, prizes were sometimes awarded without any prior announcement to make the program appear exciting and pleasantly unpredictable. Such efforts quickly led to a large base of loyal buyers who made an average of fifteen purchases in 1985. Impact of Event The success of HSN’s entry into the cablecast shopping business rapidly stimulated further growth and competition in this new area. HSN launched an ambitious expansion program by acquiring several small broadcast stations. It also started a second network in March, 1986, called HSN II. It offered more upscale and more innovative items. The home shopping phenomenon also attracted some of the major firms in the cable industry. 756

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For example, TeleCommunications Inc. (TCI, an MSO based in Denver) and Close-Out Merchandise Buyers (COMB, a Minnesota-based firm controlled by financier Irwin Jacobs) together launched the Cable Value Network (CVN), a national-level competitor to HSN. CVN positioned itself differently in the home shopping market. Unlike HSN, CVN telecasts involved more unusual items and included thematic shopping programs focusing on one type of merchandise at a given time. Similarly, Comp-UCard and Financial News Network (FNN) together launched the Teleshop cable shopping program, which unlike CVN and HSN did not own the merchandise it offered for sale. This program merely facilitated sales of merchandise for the product sources it represented; the goods sold were shipped to consumers directly from the sources.

Since the advent of the Home Shopping Network, consumers have been to order an ever-growing of array of products advertised on television. (PhotoDisc)

Will the growing popularity of cablecast shopping pitches carry negative implications for traditional retailers? Cable-based home shopping has the potential to expand impressively, and some of this growth may be at the expense of established retailers. The reasoning runs as follows: Cable shopping networks depend on discount prices (made possible by low procurement costs and relatively low overhead to create the perception of bargain shopping, which in turn should generate high sales volume; because the product’s price is the basis of competition between such outlets 757

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and traditional retailers that charge full price for similar merchandise, the latter may risk losing business. On the other hand, the reliance of cable shopping networks on opportunistic buying at deep discounts (from close-out sales, for example) could force them to sell an erratic supply of nonstandard merchandise. Because the products sold are not comparable to those sold by traditional retailers, the traditional retailers may remain relatively unaffected by the emergence of cable shopping networks. Further, an element of immediacy or time pressure surrounds purchase decisions on cable shopping networks; this characteristic, when combined with the lure of apparently attractive price discounts offered on such networks, may trigger impulse purchases unlikely to materialize in a traditional retail environment. Another argument is that home shopping is relatively new, and its success could be a passing fad. The emergence of cable shopping networks has implications for consumer education and protection efforts. The United States Office of Consumer Affairs’ Draft Consumer Education Brochure on the Televised Shopping Industry in the United States (1988) delineates several issues about cablecast shopping programs. Such programs often use a system of comparative pricing that appears deceptive. The offered price of a product is frequently compared with a baseline labeled the “retail” or “regular store” price. Cablecast programs offer merchandise that may not be available in typical stores, including “exclusive” lines, discontinued merchandise, and products from closeout sales. To the extent that such merchandise cannot realistically have a comparable retail price, the baseline “retail” or “regular” prices are misleading and deceptive. Other cost aspects of home shopping may be less than explicit. Many home shopping programs offer moneyback protection to consumers wishing to return the merchandise purchased within a limited period, but it is sometimes unclear who bears the costs of return shipping in such cases. Attention to these and other consumer education and protection issues is likely to increase in the future as growth in penetration of cable technology substantially increases the number of households with access to cablecasts from shopping channels. Television-based home shopping programs either exist at rudimentary levels or are nonexistent in most nations other than the United States. Although they were available in Japan and Germany in the early 1990’s, no specific rules or laws concerning such programs existed in these countries. Canada had a significant teleshopping industry. The Canadian Home Shopping Network was the largest network in Canada in the early 1990’s and served more than five million households, generating annual revenues of $40 million. Canada, however, lacked any direct regulations. In The Neth758

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erlands, no special rules applied to cablecast shopping programs if they reached other nations. A few other nations, including Denmark, Finland, and France, provided for a limited mandatory cooling-off period during which consumers could return goods purchased via home-shopping programs. Cablecasts represent only one of several devices that provide home shopping convenience. Other devices include mail order sales (also called direct marketing), telemarketing (sales solicitation via telephone), and interactive videotex systems that integrate telephone, television, and computer technologies to enable consumer subscribers to retrieve data on products and services held in a central computer through a dialing device. The data are displayed on the consumer’s television monitor. Mail ordering, and telemarketing have existed longer than has cable-based home shopping, and most countries have developed regulatory policies to protect consumer interests in these areas. Rules and regulations designed to protect the interests of cable shoppers had not fully evolved by the early 1990’s even in the countries in which cablecast shopping had developed. Bibliography “Cable Shopping Channel Woos Viewers Via Direct Response.” Direct Marketing 48 (June, 1985): 76-149. Presents an interview with Keith Halford, vice president of marketing for the Home Shopping Network. Discusses how the home shopping concept evolved from a radio show to local telecasting and later into a national cable network. Offers a detailed description of the day-to-day working of HSN’s home shopping service. Ciciora, Walter S., James Farmer, and David Large. Modern Cable Television Technology: Video, Voice, and Data Communications. San Francisco: Morgan Kaufmann Publishers, 1999. Dagnoli, Judann. “Home Shopping Gets Push from Cable Systems.” Advertising Age 57 (June 9, 1986): 64. Summarizes the competition scenario almost a year after HSN launched its cablecast home shopping service in the United States. Ivey, Mark, and Patrick Houston. “Don’t Touch That Dial—You Might Miss a Bargain.” Business Week, June 2, 1986, 35-36. Discusses home shopping from the shopper’s perspective, describing the range of products offered for sale and how such shows can become addictive. Klokis, Holly. “Cable TV: A Retail Alternative?” Chain Store Age Executive 62 (August, 1986): 11-14. Analyzes how established retailers perceive and react to the home shopping phenomenon. Organisation for Economic Co-Operation and Development. New Home 759

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Shopping Technologies. Washington, D.C.: Author, 1992. Reviews developments and trends in electronic marketing (shopping via telephone, television, and interactive videotex systems) in several countries; delineates conditions that may benefit consumers by encouraging competition and expanding choice. Strauss, Lawrence. Electronic Marketing: Emerging TV and Computer Channels for Interactive Home Shopping. White Plains, N.Y.: Knowledge Industry, 1983. Offers an exhaustive account of cablecast home shopping prior to HSN’s nationwide launch of this concept. A good source for understanding why earlier efforts in home shopping were not very successful. Various forms of electronic marketing in the United States, including videotex and several direct marketing devices, also are discussed. “Tele-buying.” The Economist 301 (October 18, 1986): 76. Analysis of growth and competition in the home shopping industry. Discusses HSN’s ambitious strategy to expand by buying several television broadcast stations and assesses possible implications from the perspective of cable operators. U.S. Office of Consumer Affairs. Draft Consumer Education Brochure on the Televised Shopping Industry in the United States. Washington, D.C.: Government Printing Office, 1988. Probes implications of the home shopping industry for average shoppers. Focuses on reasons and circumstances under which home shopping can be deceptive to consumers. Siva Balasubramanian Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); Cable Television Rises to Challenge Network Television (mid-1990’s); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999).

760

THE SUPREME COURT UPHOLDS QUOTAS AS A REMEDY FOR DISCRIMINATION The Supreme Court Upholds Quotas as a Remedy for Discrimination

Category of event: Labor Time: 1986 Locale: Washington, D.C. The Supreme Court, in a number of decisions, defined the permissible extent of affirmative action programs Principal personages: William J. Brennan, Jr. (1906-1997), an associate justice of the Supreme Court who wrote the majority opinions in several affirmative action cases Warren Burger (1907-1995), a justice of the Supreme Court who advocated an activist role for the court in fostering civil liberties William Rehnquist (1924), the chief justice of the United States following Burger’s retirement Antonin Scalia (1936), an associate justice of the Supreme Court Summary of Event Title VII of the Civil Rights Act of 1964, amended by the Equal Employment Opportunity Act of 1972, is intended to eliminate discrimination by employers and labor unions. In addition, Executive Order 11246 regulates employment practices of federal contractors and, in some cases, requires contractors to implement affirmative action programs to improve the opportunities of minorities and women. The implementation of these fair employ761

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ment regulations led to considerable legal interpretation. In United Steelworkers of America v. Weber (1979), the Supreme Court set down norms for legitimate affirmative action programs. The Weber criteria are that any affirmative action program must be part of an overall plan, must be voluntary, must have an objective of remedying imbalances arising from discrimination, must be temporary, and must not trammel the interests of others. Throughout the early 1980’s, the Justice Department under President Ronald Reagan argued that the objective of civil rights legislation should be to rectify injustices done to specific individuals. Giving a preference to a minority group member who was not a proven victim of discrimination was considered to be a form of “reverse discrimination” against the majority. A number of Supreme Court decisions in the 1986 session served to expand the scope of permissible affirmative action programs. In Wygant v. Jackson Board of Education, the Court supported by a five-to-four vote the concept of an affirmative action plan along the lines spelled out in Weber but opposed a provision in the plan that gave preference to black workers in layoff decisions. The plurality view of the Court was that when a person is laid off, the entire burden of the decision is borne by that employee. The rights of the laid-off worker are affected much more than in a case in which a person is not promoted. The effort to remedy discrimination imposes an excessive cost on a single person, the one laid off. In addition, the Court concluded that other remedies that imposed less cost might have been available. The view of the Court was that although seniority could be overridden in promotions and other job assignments, it should not be in layoffs. In 1975, a New York district court found that the sheet metal workers union discriminated against nonwhite workers in its apprenticeship program. The court ordered an end to the discrimination and established a goal of 29 percent nonwhite membership, to be reached by July, 1981. The percentage was arrived at based on the nonwhite composition of the local New York City labor market. The union was subsequently fined for failing to meet the goal. Both the goal and the date for achieving it were changed. A district court and the court of appeals found the union in contempt for failing to reach the court-ordered revised goals. The union appealed to the Supreme Court. The union, along with the solicitor general of the United States, argued that the membership goal and the means prescribed to achieve it were in violation of Title VII of the Civil Rights Act, which implies that no court could order admission of an individual to a union if that individual was refused for reasons other than discrimination. In Local 28 Sheet Metal Workers International Association v. Equal 762

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Employment Opportunity Commission (1986), the Supreme Court by a five-to-four vote affirmed the decision of the district court against the union. Justice William J. Brennan, speaking for the Court, asserted that even though the individuals admitted to the apprenticeship program had not themselves been previously denied admission or discriminated against, the courts had the right to provide relief when the union had been guilty of egregious discrimination or discrimination had been endemic. Brennan concluded that unless courts have the right to require agencies to employ qualified minorities roughly in proportion to their number in the labor market, it may be impossible to provide the equal opportunity that is the intent of Title VII. Brennan made a subtle distinction regarding racial quotas. Although it is clear from congressional deliberations and Title VII that quotas should not be used simply because of the existence of racial imbalance in the workplace, this does not preclude the use of quotas by the courts to rectify racial imbalances in cases in which discrimination is proven to exist. The purpose of affirmative action is not to make whole the victims of discrimination but rather to provide relief to the group discriminated against. The recipients of relief need not have suffered themselves. In Local 93 International Association of Firefighters v. City of Cleveland (1986), the Supreme Court by a six-to-three vote approved a consent decree to eliminate racial discrimination. An association of minority group members brought suit against the city of Cleveland, charging discrimination in the city’s fire department. A federal district court approved a consent decree between the city and the firefighters’ association to rectify the problem. The decree set forth a quota system for the promotion of minorities over a four-year period. The terms of the decree were arrived at by the parties to a lawsuit and were approved by the court. Local 93 was not a party to the initial suit, and it did not approve the decree. Local 93 appealed to the Supreme Court, arguing that public safety required that the most competent people be promoted. The Court again affirmed the right of the courts to prescribe corrective plans that benefit individuals who were not actual victims of discrimination. The majority of the Court further held that voluntary consent decrees can go beyond what the courts would have ordered to rectify the problem. The decision did recognize the right to challenge consent decrees in the courts. In the private sector, consent decrees arrived at with the Equal Employment Opportunity Commission could similarly be challenged as violations of collective bargaining agreements, Title VII, or the equal protection clause of the Fourteenth Amendment. In the light of a 1984 Supreme Court decision, the Reagan Administration had advised cities to reexamine consent decrees, believing that less 763

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aggressive affirmative action plans might be acceptable. The administration now found itself uncertain as to which way the court was leaning. These 1986 decisions marked the end of the activist approach of the Court under chief Justice Warren Burger while at the same time making the more conservative approach of Chief Justice William Rehnquist more difficult to establish. Impact of Event Although the 1986 decisions applied specifically to minorities, it soon became clear that affirmative action programs similar to those approved by the Court could also be applied to women. In Johnson v. Santa Clara County Transportation Agency (1987), the Court, by a six-to-three vote, concluded that promoting a woman to the job of dispatcher ahead of more qualified men was acceptable under the provisions of a voluntary affirmative action program in the public sector. The agency was to consider sex as one factor in making promotion decisions for jobs in which women were underrepresented. The long-term objective was to have employment in the agency mirror the composition of the local labor market. No explicit quota was established, but the agency was to examine annually the composition of its work force and undertake the steps necessary to achieve its long-term goal. The case arose when a woman was given the job of dispatcher over Paul Johnson, another candidate. He appealed to the Equal Employment Opportunity Commission. The EEOC granted the right to sue, and the lower court held that Johnson’s rights under Title VII of the Civil Rights Act had been violated. The court ruled that gender had been the only factor in the promotion of the woman and that the agency program was not “temporary,” as required by the Weber decision. In the majority opinion of the Supreme Court, Justice Brennan was careful to avoid the pejorative implications of quotas. He concluded that there was a manifest imbalance in the representation of women in this job classification and that the agency program did not specify a strict number of women that should be hired, but rather set aspirations, subject to change and review. Hiring was not to be based solely on the basis of sex, but rather was to use sex as one factor. Justice Lewis Powell pointed out that there were seven candidates who were deemed qualified for the job, so Johnson did not have an unqualified right to the job in the absence of the preference granted to women. Although Johnson was denied promotion, he retained his position in the agency, so that an undue burden was not imposed on him. In dissent, Justice Antonin Scalia interpreted the majority opinion as an unjustified extension of Title VII intended to alter social standards. The case 764

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was the first to establish that voluntary affirmative action programs to overcome the effects of societal discrimination are permissible. In United States v. Paradise (1987), the plurality opinion of the Court supported the promotion of one black state trooper for each white state trooper promoted. This course of action was allowed because of the narrowly defined nature of the preference and because of the egregious nature of past violations of equal rights. The Court noted that the plan was flexible and temporary and that it postponed rather than denied the promotion of white officers. In San Francisco Police Officers’ Association v. City and County of San Francisco (1987), a federal appeals court again applied the Weber test. The city used three criteria in promoting police officers: a written examination, a multiple choice test, and an oral examination. After administering the first two parts, the city found that the percentage of minorities who passed was lower than desired. The results were then rescored on a pass or fail basis, with the deciding factor for those who passed being the oral examination. The city had thus rescored promotional examinations to achieve racial and gender percentages. The court found that rescoring the examinations unnecessarily trammeled the interests of the nonminority police officers. Candidates for promotion, the court ruled, are denied equal opportunity if test results can be rescored. The practice was deceptive in that candidates had a right to know how the test results were to be weighed as they prepared for the test. In addition, other methods of correcting the racial imbalance were available that were less dramatic or less costly to others. In 1989, the Supreme Court handed down five decisions, all with fiveto-four majorities, that reversed many of the 1986 cases. Essentially, these decisions shifted the burden of proof to the employee to prove that practices by an employer were unrelated to the requirements of a job. Statistical data indicating small proportions of minority group members holding a job were no longer sufficient to claim discrimination. The Court limited the extent to which positions could be set aside by state and local governments, to be filled only by minority group members. The Court also allowed for an affirmative action program to be reexamined if, over the course of the program, employees claimed reverse discrimination. The view of the courts with regard to quotas is far from unanimous and continues to evolve. Title VII explicitly states that discrimination based on race is prohibited. In this context, quotas that discriminate are prohibited. Difficulties arise in determining whether these prohibitions are universal. Quotas implemented to achieve racial balance even though discrimination has not been demonstrated would be deemed illegal. Uncertainty occurs when discrimination has been found to exist and either voluntary or court765

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mandated programs are prescribed to rectify the problem. Critics argue that setting numerical standards in effect discriminates against the majority. Choosing one person over another is discriminatory toward the person not chosen, and the person chosen has not necessarily been discriminated against in the past. Therefore, the person chosen is given a preference that is undue and at the expense of someone else who was not a party to discrimination. The advocates of affirmative action argue that in cases in which discrimination has been proven to exist, setting numerical standards may be the only viable way of correcting a demonstrated problem. The essence of affirmative action is not to compensate actual victims of discrimination but rather to provide opportunities to groups of people who historically have been discriminated against. Individuals are given preference not because of anything done to them but rather for something done to their group. Further, the people not chosen do not lose anything they previously had or anything to which they had a unilateral right. In cases in which there is a direct loss, as in layoffs, the courts have been less willing to support numerical quotas. Businesses thus have had to walk fine lines in trying to be fair to all employees while maintaining productive work forces. Bibliography Becker, Gary. The Economics of Discrimination. 2d ed. Chicago: University of Chicago Press, 1971. One of the first efforts to apply economic analysis to the issue of discrimination in the labor market. Hall, Kermit L., ed. The Oxford Guide to United States Supreme Court Decisions. New York: Oxford University Press, 1999. Multiauthored collection of essays on more than four hundred significant Court decisions, with supporting glossary and other aids. Ratner, Ronnie Steinberg, ed. Equal Employment Policy for Women. Philadelphia: Temple University Press, 1980. A collection of readings on policies intended to ensure equal rights in employment for women in the United States, Canada, and Western Europe. Reich, Michael. Racial Inequality. Princeton, N.J.: Princeton University Press, 1981. Summarizes the extent of the racial inequality that was the backdrop for Court decisions in the 1980’s. The emphasis is on the relationship between discrimination and social unrest. Attention is given to economic theories of discrimination. Twomey, David P. Equal Employment Opportunity Law. 2d ed. Cincinnati, Ohio: South-Western, 1990. Summarizes the major legal decisions concerning the interpretation of the Civil Rights Act of 1964. Analyzes the evolution and extension of employment practices. Includes lengthy excerpts from legal opinions. 766

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United States Reports. Washington, D.C.: U.S. Government Printing Office, 1801. These annual reports present the opinions of the Court along with dissenting opinions. Reading the decisions allows a firmer grasp of the complexity of the issues involved. John F. O’Connell Cross-References The Civil Rights Act Prohibits Discrimination in Employment (1964); The Supreme Court Orders the End of Discrimination in Hiring (1971); The Pregnancy Discrimination Act Extends Employment Rights (1978); The Supreme Court Rules on Affirmative Action Programs (1979); Firefighters v. Stotts Upholds Seniority Systems (1984).

767

INSIDER TRADING SCANDALS MAR THE EMERGING JUNK BOND MARKET Insider Trading Scandals Mar the Emerging Junk Bond Market

Categories of event: Finance and business practices Time: May 12, 1986 Locale: New York, New York The rise of Drexel Burnham Lambert as a major trader in the new market for junk bonds provided opportunities for illegal insider trading, with which Dennis Levine was charged Principal personages: Dennis Levine (1952), a Drexel Burnham Lambert investment banker who provided evidence against the insiders Ivan Boesky (1937), a New York arbitrage trader, the first of the insiders convicted on evidence supplied by Dennis Levine Michael Milken (1946), the pioneer of junk bonds and the central figure in the government’s prosecution of insider trading in the 1980’s Summary of Event In the 1980’s, the emergent market for junk bonds offered opportunities for violations of insider trading laws. Those laws had prohibited stock and bond traders from profiting from transactions about which they had privileged information. The nature of placing such issues with buyers, however, blurred the line between information that was privileged and that which was not. On May 12, 1986, Drexel Burnham Lambert investment banker Dennis Levine, who had represented Pantry Pride in its battle with Revlon, was 768

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accused of trading on nonpublic information. As part of the deal Levine worked out with prosecutors, he testified against other insiders, including Ivan Boesky. Eventually Boesky received a deal from prosecutors for agreeing, along with Levine, to provide testimony against Drexel Burnham Lambert banker Michael Milken. In March, 1989, the federal government indicted Milken. Businesses traditionally have raised capital by selling either stocks or bonds. Stock prices reflect immediate changes in companies’ assets, profitability, net worth, or future prospects. Bonds, however, as a loan from the buyer to the company, usually carry a specified return payable at a future date. To convince buyers that certain bonds are sound, large investment banking houses grade the bond issuers as to their quality (or, inversely, as to the risk of their bonds). A company carrying a “AAA” rating on its bonds is considered to be extremely creditworthy; a company with a “B” will have a more difficult time obtaining capital. The rating system in the 1980’s tended to favor older, established companies and heavy industries at the expense of newer, rapidly growing companies and growth industries such as telecommunications, computers, and biotechnology. Another problem with the rating system was that by the 1980’s some eight hundred companies had bond ratings of “BBB” or better—considered the minimum investment grade—and yet were in poor financial shape. Penn Central Railroad qualified for a “BBB” rating two weeks before it went bankrupt, and foreign nations such as Argentina and Mexico also received high bond ratings on the eve of their defaults to U.S. creditors. Moreover, not one business owned by a woman or a minority qualified for an investment-grade rating. On the contrary, by 1989 more than twenty-one thousand companies, mostly smaller businesses, failed to qualify for a “BBB” rating or better. Obtaining capital proved difficult. To receive an investment-grade rating on its bonds, a company had to have a long history of growth, but it could not grow without capital. A number of profitable, well-known companies found themselves in that situation, including Holiday Inns, Safeway, the MGM/UA and Orion motion picture studios, and MCI Communications. In 1973, none of the major investment houses had any interest in those companies. Morgan Guaranty Trust, Shearson Lehman Brothers, Merrill Lynch, and the other large investment bankers had a bias toward older industrial companies. Virtually the only banking house that saw any profit in trading in the newer companies was Drexel Burnham Lambert in New York City (commonly referred to as Drexel), a banking house descended from the partner of J. P. Morgan’s father, Junius. Even within Drexel, only one banker, Michael Milken, saw the potential of bond issues by such 769

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businesses. Milken, impressed with a study showing that yields on a diversified portfolio of low-grade bonds exceeded those of a higher grade portfolio even after accounting for defaults, decided to specialize in lowgrade issues. He researched companies relentlessly, simply outworking almost everyone else. Like Boesky, Milken had the exceptional ability to work on four hours of sleep a night, and both men were in their offices before 6 a.m. Milken developed high-yield/high-risk bonds for those companies that could not obtain investment ratings. These became known as junk bonds. The rise of a junk bond market irritated the old-line investment houses, which suddenly found themselves losing their ability to dictate financial life and death through their ratings system. Drexel soon had more than a thousand clients wanting to issue junk bonds. Milken’s financial democracy also undercut the established houses from below, opening up a new network of customers whom the traditional houses had scorned, such as Carl Lindner, Sol Steinberg, Meshulam Riklis, and David Solomon. These corporate “raiders” looked to acquire companies to sell rather than to run as efficient businesses. To reach retail buyers, Milken and Frederick Joseph (later the chief executive officer of Drexel) invented a class of high-yield bond funds that provided diversified portfolios accessible to customers who had smaller amounts of money to invest. The funds paid a yield on average that was 2.5 percent higher than the yield on U.S. Treasury bonds. Drexel grew rapidly as a dealer in junk bonds. In 1978, the company issued $439 million in junk, accounting for 70 percent of the market. Certainly not all junk bond deals were profitable. American Communications Industries, for which Drexel issued $20 million in bonds, became the first company to default without making a single interest payment. Risks came with junk, but so did potentially high returns. Increasingly, Drexel issued new debt paper to replace old debt a company carried. That built in an immediate pressure to conclude deals, requiring Milken to develop a new unregistered type of security that did not have to languish in the offices of the Securities and Exchange Commission (SEC). Under Section 3(a)9 of the Securities Act of 1933, companies could offer new paper in exchange for old without registering, provided that the investment bankers did not accept a fee for promoting or soliciting the exchange. Instead, Drexel (and Milken) took some of the paper for itself. In the early 1980’s, over a five-year period, Drexel completed 175 3(a)9 exchange offers totaling more than $7 billion in junk bond debt. Drexel’s default rate was an astoundingly low 2 percent, whereas other traditional houses generally had default rates as high as 17 percent on their standard exchanges. In an era during which critics complained of the recklessness 770

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and high risk associated with junk bonds, Drexel’s issues were the safest of any except government bonds. Drexel spotted firms primed for fantastic growth, such as MCI Communications (in which Drexel itself held $250 million in bonds) and businesses no other house would touch, such as the Golden Nugget casino in Atlantic City, New Jersey. The firm’s profits soared from $6 million in 1978 to $150 million in 1983. Milken developed another device, called the “highly confident” letter, known to insiders as the Air Fund, because nothing was in it. Drexel could raise a billion-dollar line of credit by claiming it had an account to purchase securities itself. In fact, the “highly confident” letters represented selffulfilling prophecies: The issue of such a letter convinced others that Drexel had capital, so others invested until Drexel ultimately did have capital. Using that strategy, Milken financed T. Boone Pickens’ hostile takeover of Gulf Oil by Mesa Petroleum, Sol Steinberg’s Reliance Corporation’s attempted takeover of Disney, and Carl Icahn’s bid for Phillips Petroleum. In each case, Drexel and Milken earned phenomenal amounts, up to $500,000 in advisory fees plus 3 to 5 percent of the deal. In the Triangle-National Can takeover, for example, Drexel netted $25 million plus 16 percent of Triangle’s stock. Milken earned such fees because he could do the seemingly impossible. In one 1985 deal, for example, he raised $3 billion from 140 institutions in less than seven days. The difficulties and potential illegalities in junk bonds involved the requirement to move the bonds from the first tier of investors to the second tier, who generally wanted to avoid junk bonds publicly. Bonds had to change hands rapidly, far more quickly than they could be registered with the SEC, and technically, if the first-tier buyers intended to resell their bonds all along, they violated the law by doing so. Proving intentions in such cases was impossible without the testimony of insiders. Thus, when federal authorities finally found Dennis Levine, upon whom they could hang enough charges to persuade him to turn state’s evidence, jurors had to choose between Milken’s description of his buyers’ intentions and Levine’s account of events. In March, 1989, after more than five years of SEC investigations, federal authorities charged Milken with 98 counts of securities fraud violations. On April 20, 1990, Michael Milken pleaded guilty to six counts, and in November, 1990, he received a sentence of ten years in federal prison. Observers immediately noted that ninety-two counts had vanished, including some of those thought to be the strongest insider trading counts. Milken started serving his sentence in March, 1991, and was eligible for parole in March, 1993. A reduction in his sentence allowed his release on January 2, 1993, to a halfway house and his full release on February 4, 1993. 771

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Impact of Event The indictments of Levine, Boesky, and Milken reaffirmed the power of the federal government and its intent to regulate the securities markets. Certainly by 1980 technological changes in the exchanges themselves and the evolution of new instruments of debt, such as the 3(a)9 and the “highly confident” letter, had far outpaced the capability of the government to regulate securities exchanges. Neither the 3(a)9 nor the “highly confident” letter was illegal, but the pace at which deals were negotiated encouraged blurring the lines between a statement of a company’s financial status and an illegal prediction of performance. The government took the view that the notices of offerings constituted “tips.” No public presentation of evidence was ever held. Both Levine and Boesky had personal incentives to slant their testimony for the purposes of the government prosecutors, as they bargained with the government and offered evidence intended to implicate others. Milken originally pleaded not guilty and seemed prepared to fight, but the indictment of his brother Lowell in March, 1989, put more pressure on Milken. Most observers believed the prosecution of Lowell Milken to be little more than leverage to force Michael Milken to plea-bargain instead of going to trial. The government also made it clear that it intended to go after the sizable Milken family fortune, whereas in the case of Ivan Boesky, who paid a record fine of $100 million, the SEC allowed Boesky to keep his considerable fortune. Those factors caused Milken to change his plea to guilty on six felony fraud charges in April, 1990. On November 21, 1990, Judge Kimba Wood sentenced Milken to ten years in prison. In addition, Milken had to settle a lawsuit by the Federal Deposit Insurance Corporation (FDIC), adding $500 million to the $600 million he already had paid. Milken’s total restitution came to an estimated $1.3 billion. In the Milken case, the government used the Racketeer Influenced and Corrupt Organizations (RICO) Act, aimed at violent mobsters, to seize Milken’s assets before the trial actually started. The use of the RICO statute to convict Milken, hailed as a victory by the government, represented an attack on capital and a victory of traditional Wall Street firms and their lawyers over capital entrepreneurs. Even the public opinion that came to be associated with the term “junk bonds” reflected the extent of the victory by the established capitalists. Few people ever would guess that Safeway, MCI Communications, or dozens of other rising businesses had benefited from high-risk bonds. Critic Ben Stein repeatedly contended that junk bonds had plummeted in value, harming buyers, yet the government built its case on the proposition that Milken’s own junk bond assets had risen in value. Not everyone agreed that Milken was a greedy opportunist. Supporters 772

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claimed that he had offered hope to companies that other firms were unwilling to help. His bond deal with MCI Communications made it possible for the firm to challenge American Telephone and Telegraph in the long distance market, for example. Despite his guilty plea, serious questions remain as to whether Milken actually broke any laws or merely plea-bargained to save his family and fortune. His own guilty pleas, if essentially obtained under duress, are not the smoking gun that critics have tried to find. Milken’s activities raised the more difficult question of what constituted “insider” trading. Some economists contended that the very concept of “insider” information was problematic. In an industry in which information is worth money, such as the stock and bond markets, all data about any company potentially is privileged. Of greater significance was the reputation junk bonds acquired. The collapse of the savings and loan (S&L) industry in the 1980’s further tainted junk bonds, although critics note that the incentive to use junk bonds came from the deposit insurance offered by the federal government. Several studies found a high correlation between deposit insurance and high-risk activities by banks and S&Ls. When the S&Ls found themselves in trouble in the early 1980’s, many sought the high returns available in junk bonds. Economists and most traders understood that high returns carried high risks. For many S&Ls, however, the choice was between risky high-yield bonds that might cause losses and bankruptcy or business as usual, which would lead to certain bankruptcy. Few studies have focused on the S&Ls that survived by investing in junk. Milken himself maintained that the S&L industry lost money because of investments in real estate, not because of high-yield bonds. As long as Milken and Drexel had control of junk bond offerings, the ratio of winners to losers was high. Once other houses started to offer junk, quality depreciated to approximate its name as firms accepted clients with lower creditworthiness once the best prospects had been taken. That in no way diminished the role of low-grade bond instruments, which offered capital to new companies or to “outcasts.” Drexel’s success and low default rates on its issues showed that markets had overlooked some worthy companies. Drexel’s success also led to high expectations of performance for other instruments of lesser quality. Junk bonds in that respect became victims of their own success. The insider trading scandals prompted new efforts to tighten securities laws. At the same time, the scandals reinforced the notion that the United States had become a nation that merely moved paper and made money from money rather than from products. The success of Milken and others encour773

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aged business students to concentrate on investment banking in their search for the most lucrative careers. Buying and selling companies was perceived as a quicker route to financial success than was developing a strong company with a good product. Milken operated on the frontiers of securities innovation, and often no law regulated or guided what he did. Although he frequently may not have known if his activities were strictly legal, most of the time the authorities would not have been able to ascertain their legality either. Milken can be compared to a biogeneticist developing new life-forms long before the law considered the ramifications of creating artificial life. Milken has been compared to J. P. Morgan for his democratization of the capital markets. Milken and his junk bond raiders arguably made the management of American companies much more responsive to their stockholders, as inefficient managers could find themselves bought out of their jobs by raiders who thought they could manage better. Bibliography Bruck, Connie. The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. Rev. ed. New York: Penguin Books, 1989. An earlier edition was the first book to deal with Drexel Burnham Lambert and the rise of junk bonds. Provides a reporter’s analysis of Wall Street. Bruck, while never excusing Milken’s excesses, nevertheless is more balanced than are others in assessing the value of junk bonds and the revolution Milken created in financing small, growing companies. Indispensable for research on this topic. De Trolio, Peter. “Ivan F. Boesky.” In Banking and Finance, 1913-1989. Volume in The Encyclopedia of American Business History and Biography, edited by Larry Schweikart. New York: Facts on File, 1990. A biographical essay on Boesky based on news sources. Useful as a quick reference. Schweikart, Larry. “Michael R. Milken.” In Banking and Finance, 19131989. Volume in The Encyclopedia of American Business History and Biography. New York: Facts on File, 1990. One of the few capsule biographies of Milken available, this essay finds Milken as less culpable of criminal behavior than other reports suggest and supports elimination of insider trading laws. Published before Milken’s conviction and imprisonment. Includes perspectives on Milken from numerous editorials and writers. Stein, Benjamin J. A License to Steal. New York: Simon & Schuster, 1992. A longtime critic of leveraged buyouts and financial innovations, Stein, a lawyer, takes a negative view of Milken and Drexel’s activities. His 774

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disgust with virtually all the new financial mechanisms, such as leveraged buyouts and junk bonds, puts him at variance with most other conservative writers on the subject, such as Jude Wanniski and George Gilder. Stewart, James B. Den of Thieves. New York: Simon & Schuster, 1991. As the title implies, this is a “detective story” approach to the scandals, with Milken, Boesky, and others as the villains and a courageous group of government detectives as the heroes. Stewart is as critical as Stein, though much more thorough in his research. Stewart’s evidence comes from the public record and testimony by Boesky—which Stewart maintains is more consistent than that of Milken—and lacks any inside testimony by Milken. Larry Schweikart Cross-References The Federal Reserve Act Creates a U.S. Central Bank (1913); The Banking Act of 1933 Reorganizes the American Banking System (1933); The Banking Act of 1935 Centralizes U.S. Monetary Control (1935); Congress Deregulates Banks and Savings and Loans (1980-1982); Drexel and Michael Milken Are Charged with Insider Trading (1988); Bush Responds to the Savings and Loan Crisis (1989).

775

THE IMMIGRATION REFORM AND CONTROL ACT IS SIGNED INTO LAW The Immigration Reform and Cont rol Act Is Signed into Law

Category of event: Labor Time: November 6, 1986 Locale: Washington, D.C. The immigration reform bill enacted in 1986 granted amnesty to some aliens in the United States, prohibited the employment of illegal aliens, and sought to curtail illegal immigration Principal personages: Jimmy Carter (1924), the president of the United States, 19771981 Peter Rodino (1909), the sponsor of immigration reform bills in 1982 and 1986 Romano Mazzoli (1932), the cosponsor of reform bills in 1982 and 1986 Theodore Hesburgh (1917), the chairman of a select committee on immigration reform Ronald Reagan (1911), the president of the United States, 19811989 Alan Simpson (1931), a congressional proponent of immigration reform Edward Kennedy (1932), an advocate of important reform amendments Charles Schumer (1950), the congressman who negotiated a compromise on temporary farm workers Robert Garcia (1933), a congressional opponent of proposed reforms 776

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Summary of Event Immigration-related problems had captured national attention in the United States by the late 1970’s, despite the reforms intended by sponsors of the Immigration Reform and Nationality Amendments of 1965. By the early 1980’s, spokespersons for trade unions, the American Legion and other patriotic associations, churches, organizations of social workers, the media, civil rights groups, and institutions for the study of immigration evinced serious concerns about the economic, social, and political consequences of the growing flood of immigrants. Several specific causes fed the nation’s deepening anxieties about post1965 immigrants, aside from issues arising from their growing number and their Third World origins. First, ample evidence indicated that beyond America’s borders, the reservoir of potential immigrants was brimming over. This was in addition to the 60 percent increase that marked the legal influx after passage of the 1965 amendments. Immigration was therefore not an issue that would go away. Second, despite the frenetic efforts of the Immigration and Naturalization Service (INS), millions of illegal immigrants had poured into the country across the Mexican border during the late 1960’s and 1970’s. Some estimates placed their numbers at between two and four million, though experts conceded that no one could be sure of any figure. This invasion appeared to have no end. Third, the backup of foreign refugees had reached unprecedented dimensions by 1980. Experts described a “global refugee crisis” involving between twelve and thirteen million people. Many of them were eager to come to America for refuge, leading one congressman to remark that nearly everybody in the world would emigrate to America if free to do so. Certainly communication and transportation technologies had made America more accessible than ever. Before passage of the 1980 Refugee Act, the United States had already accepted 677,000 refugees, three times as many as any other country. Seventy thousand more refugees were allowed entrance each year after the Refugee Act went into effect. During the early 1980’s, public attention was captured by issues brought up by the so-called “Fourth Wave” of legal and illegal immigrants. Could they be and should they be assimilated, since most were Asians or Latin Americans drawn from cultures radically different from that of the United States? What impacts would they have on the work force and the national economy? Would the INS prove capable of controlling America’s borders, of ferreting out illegal aliens, and of maintaining respect for civil liberties? Was it possible to minimize the corruption with which nearly all aspects of immigration were tainted? 777

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Addressing these fears, Congressman Peter Rodino initiated and President Jimmy Carter supported a 1978 bill imposing sanctions against employers who hired illegal immigrants. The bill failed to satisfy either pro- or antiimmigration forces. President Carter then appointed a committee, composed of members of the House and the Senate as well as cabinet members, to study and make recommendations on immigration and refugee problems. Chaired by the president of the University of Notre Dame, the Reverend Theodore Hesburgh, the committee concluded its two-year study in January, 1981. The committee’s report gave priority to restraining illegal immigration while judiciously accepting slight increments to legal immigration aimed at family reunification. Recognizing humanitarian considerations, it nevertheless determined that the time for massive legal immigration had passed. Following the final report, in December, 1981, an immigration task force created by President Ronald Reagan made recommendations that were forwarded to Congress. There, two proponents of immigration reform, Rodino and Kentucky’s Congressman Romano Mazzoli, presented the Immigration Reform and Control Bill of 1982, embodying most of the Reagan Administration’s proposals. Although the bill failed, it was persistently reintroduced through 1984 as the Simpson-Mazzoli bill. The hotly debated measure became the core of the Immigration Reform and Control Act of 1986 (IRCA). IRCA superseded previous law, which had allowed the hiring of illegal aliens. It imposed sanctions on employers who did so and required them to maintain records proving the citizenship of employees. Fines were to be invoked against employers who hired illegal aliens, with criminal penalties imposed on those with a pattern of illegal employment. The act further offered an amnesty period to illegal aliens who had been resident in the United States since 1982, allowing them to apply to legalize their status. About three million previously illegal aliens opted to change their status. Essential to IRCA’s passage were provisions for temporary foreign workers, who entered the United States seasonally to harvest perishable crops. Congressman Charles Schumer successfully pressed for a Special Agricultural Workers amnesty (SAW) allowing aliens who had worked in the United States for ninety days between 1985 and 1986—their number was estimated at 250,000—to become temporary aliens and then permanent resident aliens. By 1988, 1.3 million people had claimed SAW amnesty, most of them from Mexico. Impact of Event IRCA was a highly politicized piece of legislation representing years of congressional controversy. Black leader Jesse Jackson and his Rainbow 778

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Coalition had opposed it, and so too had members of the Congressional Black Caucus. Earlier versions of its provisions relative to agricultural workers had drawn consistent fire from the Congressional Hispanic Caucus, which included New York’s Robert Garcia and Matthew Martinez, as well as from farm workers’ organizations and the growers who employed their members. Proponents and opponents of the law were not divided neatly along liberal/conservative or party lines. At various stages of its genesis, guarded support had come from Massachusetts liberal Edward Kennedy, Wyoming’s conservative Alan Simpson, New Jersey’s moderate conservative Peter Rodino (who at first battled reform), and Kentucky’s Romano Mazzoli. The opposition variously enjoyed support from Speaker of the House Thomas “Tip” O’Neill, liberal Walter Mondale, and conservative Democrat Lloyd Bentsen. Polls indicated during the early 1980’s that most Americans wanted immigration reform. Proponents included majorities of Hispanic Americans, African Americans, church leaders and leaders of patriotic orders, and spokespersons for organized agricultural labor interests. Each group, however, tended to perceive reform from different perspectives. Despite extensive public and private studies of immigration problems, hard evidence on the number of potential immigrants, the number of illegal immigrants, the number of prospective refugees, and the extent of corruption undermining extant laws was elusive. Amid these complexities, the impact of IRCA was hard to predict. Some results were quickly apparent. The INS reported that the entry of illegal aliens into the United States apparently declined during 1987 and much of 1988. There had been 1.6 million apprehensions in 1986. This decline was attributed to IRCA’s amnesty provisions. By 1989, however, the INS estimated that its monthly apprehension rate had increased. Scholars cautioned that IRCA had been in operation for too short a time to allow accurate assessments of its effectiveness. Stringent enforcement of IRCA was contingent on documentary information supplied by employers. The INS and immigration scholars agreed that in this regard corruption continued to be rife. Fabrication of false documents reportedly was a brisk trade. Already feeling overburdened by governmental regulations and interference with their workers, most employers were hostile toward sanctions against hiring illegal aliens. Growers in particular feared shortages of workers and resented INS seizures of undocumented persons in their fields. Nevertheless, official reports indicated that IRCA’s deterrent effects on employers were becoming apparent by 1988, by which time several high-visibility prosecutions were under way. 779

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The INS called for more funds, more personnel, and more elaborate ditching and fencing along the Mexican border. In addition, INS supporters continued to propose—as they had done for decades—that the federal government devise more foolproof forms of identification than were provided by easily forged Social Security cards and green cards. Arguments were made in favor of a national identity card, of the kind familiar to many Europeans, for all Americans. Millions of illegal crossings of the Mexican border were only one large part of a complex pattern of illegal immigration. Thousands of Irish people, plagued by a depressed economy during the early 1980’s, also came to America illegally. Failing to qualify under the preference system or as refugees, they arrived as tourists and stayed in the United States when their visas expired. Rough calculations placed their number at about 100,000 in the late 1980’s, most of them holding jobs in construction and child care in the Irish enclaves of Boston, Chicago, and New York City. Although they were unlikely to be apprehended, they were locked in low-paying jobs and were without health insurance. Illegal status notwithstanding, these Irish emigrants soon formed the Irish Immigration Reform Movement (IIRM), urging Congress to legalize their status and demanding the admission of additional Irish immigrants. After IRCA’s passage, Massachusetts Congressman Brian Donnelly contrived to have ten thousand visas placed in lottery for countries, like Ireland, that had been hurt by provisions of the Immigration Reform and Nationality Act of 1965. Forty percent of these visas went to Irish applicants. Desiring still more visas, IIRM subsequently became one of the lobby groups behind the Immigration Act of 1990. Meanwhile, IRCA’s operation appeared to help resolve a running debate over the economic impact of Third World immigrants who, since the 1960’s, had been the predominant elements in what had become the most massive immigration in American history. Legal immigration between 1980 and 1986 averaged 570,000 per year, nearly half from Asian nations and another one-third from Latin America. Critics of more open immigration argued that immigration laws were out of phase with the needs and conditions of the American economy. They dismissed contentions that newcomers created jobs, pointing, among other things, to such practices as “networking,” through which newly arrived immigrants tended to hire members of their own families or other new arrivals rather than jobless Americans who had been in the country longer. By the late 1980’s, most economic research, according to a 1989 Labor Department survey, showed that while not an unmixed blessing, immigration produced more benefits than liabilities. These benefits were general780

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ized in the form of lower product prices and higher returns to capital. Immigration created jobs and stimulated demand, thus producing overall economic growth that in turn reduced unemployment. Economists and demographers agreed that a slowdown in American population growth and America’s inability to produce sufficient numbers of workers to fill future jobs would result in labor shortages, a shortfall of perhaps 27 million workers by the year 2000. Both business leaders and legislators seemed convinced by these conclusions, setting the stage for the Immigration Act of 1990. Bibliography Borjas, George J. Friends or Strangers. New York: Basic Books, 1990. A decade of research on post-1965 immigration and its effects on transforming the American economy. Focuses on the types of immigrants the United States attracts, their impact on the economy, and whether the United States is competitive in the immigration market. Part 1 is an excellent overview. Part 2, concerning immigration’s effects on the jobless, the poor, and minorities, is clearly written and informative. Recognizes the importance of human rights, liberty, and human values, aside from economic considerations. Bouvier, Leon F. Peaceful Invasions. Lanham, Md.: University Press of America, 1992. Written by a professional demographer with lengthy public service. Emphasis is on changes wrought by post-1965 immigration. Claims a pro-immigrant position but discusses economic and social destabilization flowing from politically expedient policy making. Brief chapter notes, tables, select bibliography, and fine index. Briggs, Vernon M., Jr. Mass Immigration and the National Interest. Armonk, N.Y.: M. E. Sharpe, 1992. The author is a Cornell labor economist and former member of the National Employment Council. He is critical of the thoughtlessness of post-1965 policy for failing to give proper regard to the kind of human capital allowed to enter the United States. Advocates immigration policy consistent with the needs of the rapidly changing labor market. Important for critical perspectives. Crewdson, John. The Tarnished Door. New York: Times Books, 1983. The author is a Pulitzer Prize-winning expert on immigration. Scholarly in substance, but clearly written for nonspecialists. Filled with telling personal vignettes and freshened by talks with policymakers. Crewdson’s opinion is too many alarms have been sounded about adverse effects of immigration and that the United States increasingly will need immigration. Many well-integrated quotations, but no notes or bibliography. 781

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LeMay, Michael C. From Open Door to Dutch Door. New York: Praeger, 1987. A fine historical survey of immigration policies since 1820. Highly critical of employer sanctions. Does a good job of placing policy changes in the context of depressions, social unrest, civil rights campaigns, and national anxieties such as the Red Scare after World War I and the anti-Communism of the McCarthy era. Chapter 6 deals with IRCA, its background, and its early effects. Instructive tables, graphs, and appendix. LeMay, Michael C., and Elliott Robert Barkan. U.S. Immigration and Naturalization Laws and Issues: A Documentary History. Westport, Conn.: Greenwood Press, 1999. Collection of primary documents on immigration history, with bibliographical references and index. Reimers, David M. Still the Golden Door. 2d ed. New York: Columbia University Press, 1992. The author is a social historian who emphasizes the character and effects of Third World immigration on the United States after 1945. The background of and controversies over IRCA are discussed principally in chapter 7. Sees Third World immigrants as positive contributors to American life. Simcox, David E. Measuring the Fallout: The Cost of the IRCA Amnesty After Ten Years. Washington, D.C.: Center for Immigration Studies, 1997. Clifton K. Yearley Cross-References Congress Restricts Immigration with 1924 Legislation (1924); The United States Begins the Bracero Program (1942); The Civil Rights Act Prohibits Discrimination in Employment (1964); American and Mexican Companies Form Maquiladoras (1965); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986).

782

THE U.S. STOCK MARKET CRASHES ON 1987’S “BLACK MONDAY” The U.S . Stock Market Crashes on 1987’s “Black Monday”

Category of event: Finance Time: October 19, 1987 Locale: New York, New York After sliding downward for weeks, stock prices on the New York Stock Exchange collapsed on “Black Monday,” causing fear of a repetition of the crash of 1929 Principal personages: Alan Greenspan (1926), the chairman of the Federal Reserve Board, whose prompt action helped prevent a further deterioration of stock prices after the crash John Phelon (1931), the chairman of the New York Stock Exchange, who rallied floor brokers during the crash James A. Baker III (1930), the secretary of the treasury Nicholas Brady (1930), chair of an influential committee that studied causes of the crash Summary of Event Throughout the late summer and early autumn of 1987, prices of stocks on the New York Stock Exchange (NYSE) fell irregularly. Some analysts thought a major “correction” was coming, believing that prices were higher than merited by the earnings and financial outlooks of companies. Other analysts were convinced that there would be a rise in prices. In retrospect, it is not difficult to isolate elements in the market structure that indicated a major collapse. At the time, however, a drop of several hundred points of the Dow Jones Industrial Average (DJIA) in a single session seemed farfetched. 783

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On August 25, 1987, the Dow Jones Industrial Average, a weighted average of the prices of the stocks of thirty major companies, closed at 2,747, a new high. Stock prices had more than tripled in the past five years, and the market had advanced 43 percent since the beginning of the year. The market began to falter, perhaps in fear of a correction. Some analysts warned of a repetition of the 1929 crash. The stock market as a whole was quite different in 1987 from what it had been in 1929, making comparisons unproductive. For one thing, it now was global, with New York, Tokyo, and London inextricably tied together. New financial instruments and techniques had developed in the 1970’s and 1980’s, along with changes in the customer base. One change came in 1973, when the Chicago Board of Trade created the Chicago Board Options Exchange. Options, which are contracts to purchase or sell a specified number of shares of a stock at a set price on or before a specified time, offered a new way to wager on the price of shares or to hedge a position, protecting against a movement in a stock’s price. Other options markets followed, along with additional derivative instruments. There were options on stock indices, options on stock groups, and even options on options. These options were used imaginatively by speculators sitting in front of computer consoles, using software that triggered sales and purchases. Arbitrageurs, who simultaneously bought and sold stocks or options to profit from disparities in the markets, would buy options on a stock index and sell the underlying shares, or do the reverse, when profits might be realized, leading to wide activity and swings in price. A trade triggered by one computer might be large enough to change prices enough to trigger other computers, making the process rapid, interactive, and volatile. On the day options expired—when the contracts to buy or sell had to be fulfilled or settled— trading activity could be wild and unpredictable. Another new feature of the markets was portfolio insurance. A portfolio manager could sell index futures, with the cash from the sale used to offset price declines. As stock prices moved in one direction, the value of the futures changed to offset the gain or loss. Most investors did not know what portfolio insurance was, but there was between $60 billion and $90 billion of it in force that summer. As a result of the trade deficit of the United States and the lure of American securities, a substantial amount of foreign money entered the U.S. stock market. Pension funds were big players, as were insurance companies and trust accounts. There had been an explosion in mutual funds as small investors pooled their money to invest in diversified portfolios. Together these institutions owned half the shares in American companies and accounted for around 70 percent of trading activity. 784

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To this mix were added other major factors. One was the climax of takeover activity, as corporate raiders such as T. Boone Pickens, Carl Icahn, and Sir James Goldsmith went after large companies, causing their share prices to rise. Several Wall Street figures already had been caught in insider trading, or using nonpublic information to profit on stock transactions. The prospect of further investigation into insider trading unsettled the financial community. More important was a February meeting of world financial leaders in Paris. They had agreed to maintain the relative value of their currencies, and toward that end U.S. Secretary of the Treasury James A. Baker III had agreed to bring down the U.S. federal deficit. At the same time, the Japanese and the Germans would stimulate their countries’ economies. The dollar started to decline in value anyway, causing consternation in the money markets. On September 4, Federal Reserve Board Chairman Alan Greenspan announced a boost from 5½ to 6 percent in the discount rate, the interest rate that Federal Reserve banks charge for loans to other banks. This indicated that Greenspan meant to fight the inflation likely to come with the lower dollar. Greenspan also may have wanted to stifle the vigorous bull market. Bond prices collapsed at the prospect of higher interest rates. The DJIA responded by declining 37 points that day, 38 the following day, and 16 on September 9 before leveling at 2,545. The market rallied and closed the month at 2,596. The market was skittish in early October, as meetings between President Ronald Reagan and German leaders collapsed, leading to suspicion that the accords reached in Paris would not be honored. The U.S. trade deficit was larger than expected, and there was talk of higher taxes to balance the budget. The DJIA fell 92 points on October 6, closing at 2,549, and continued to slide on the days following. Between then and October 15, there were only two days on which the DJIA rose. On Friday, October 16, the DJIA lost 108 points to close at 2,247. Even before the market opened on the following Monday, it was apparent that trading would be unsettled. Portfolio insurance and arbitrage activities, in addition to developing panic, would pull the market down. Later it was learned that major mutual and pension funds had placed large sell orders before the opening. Arbitrageurs were in action, placing their sell orders. Later it would be learned that five money managers had placed sell orders on contracts worth $4 billion before the opening. Meanwhile, Wall Street learned of sharp declines on the Tokyo and London markets. With these factors in place, it is not surprising that stocks opened at 2,047, 200 points lower than the Friday close, on heavy volume. The DJIA then rose 100 points in half an hour, on record volume. Panic selling developed around the world. Many would-be sellers could not get through 785

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to their brokers. NYSE specialists in certain stocks suspended trading because they were unable to find support levels, at which prices buyers would balance sellers. Market makers for the National Association of Securities Dealers Automated Quotations (NASDAQ) market, an over-thecounter trading exchange, also refused to deal in some shares. Even so, prices held remarkably steady throughout the morning and early afternoon. The DJIA was at 2,053 at 1:30, but it collapsed, closing at 1,739. In one day, more than a trillion dollars in stock values had been wiped out on the NYSE, on a volume of 604 million shares. The DJIA had fallen 508 points, more than one-fifth of its value. Largely unnoticed in all of this was a sharp rise in the bond market, which received a good deal of the money that went out of stocks. This was significant, since the government bond market, by itself, was ten times larger than the stock market. Gains in bonds more than outweighed losses in stocks. That night analysts spoke ominously of the crash and what might follow. Given more attention was the announcement that the Federal Reserve banks would aggressively purchase government bonds, thus providing financial markets with needed liquidity. Impact of Event That night, the stock markets of other countries plunged. Tokyo’s Nikkei index fell 15 percent, and the slump in London continued, with a 22 percent loss in two sessions. The same held true in secondary markets. Singapore’s was down 21 percent, Australia’s fell 25 percent, and those in Hong Kong and New Zealand simply shut down. If there was proof needed that the world’s markets were connected, it was provided early that week. The NYSE opened up 211 points the following day, Tuesday, October 20, and for a while it seemed that the hoped-for “bounceback” had taken place. The DJIA then fell almost 100 points in the first half hour, rallied, and then fell again. By 12:30, it was at 1,712 and falling. In retrospect, this was the key moment in the panic. Stocks held at this level, rose, fell again, and rallied in the last three hours to close at 1,841, up 103 points on the day, its first triple-digit gain. The market rose 187 points on Wednesday, fell 78 points on Thursday, and rose by 1 point on Friday to close the week at 1,950. There was a 157-point loss the following Monday, but trading volume indicated that it was not caused by a panic. Rallies enabled the DJIA to end the month at 1,994. The index had lost more than 600 points in October. During that month, scare headlines and dour predictions prompted thoughts that the crash would follow the pattern of 1929. The New York Times charted the 1987 market against that of 1929. The market’s recovery 786

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and continued strength soon caused such fears to dissipate. By mid-November, it appeared that all would indeed be well. The shakeup in the stock market apparently had not caused more widespread problems. Payrolls swelled in October in the best performance since September, 1983. During the first ten months of 1987, factory employment expanded by 26,700 jobs per month, compared with average monthly losses of 30,000 in 1985 and 13,500 in 1986. Department store sales increased on a year-to-year basis by 1.4 percent, while consumer spending rose by 0.5 percent. Christmas sales would reach a new record. The Commerce Department would reveal that the U.S. gross national product had advanced by an annualized rate of 4.1 percent during the third quarter of 1987. Foreign central banks began reducing their key interest rates, led by the German Bundesbank, which reduced short-term rates from 3.5 percent to 3.25 percent. There was talk of a new international monetary conference. Lower interest rates may have invigorated spending in other countries, increasing U.S. exports and lessening pressure on the trade deficit. By the year’s end, several fact-finding commissions were at work investigating the crash. One, sponsored by the federal government, was headed by former New Jersey senator and future secretary of the treasury Nicholas Brady. The NYSE conducted its own investigation, chaired by former attorney general Nicholas Katzenbach. In addition, there were investigations by the Chicago Board of Trade, the Chicago Mercantile Exchange, and the General Accounting Office. As might have been expected, the Chicago Board of Trade report exonerated the options market from blame, and the NYSE report did the same for its specialists. The Brady group, the most impartial of the lot, placed most of the blame for the crash’s severity on portfolio insurance and program traders, the traders who placed huge orders based on computer programs. The Brady Commission put forth several recommendations. The first involved “circuit breakers” between the stock indexes and the market. When certain disparities developed, trading would be suspended temporarily. In addition, all trading would be halted when prices declined by a specified figure. The Brady group recommended greater regulatory oversight of index options markets and higher margins (percentages of the value of an option that a buyer had to put up front) to be employed in their use. It wanted a single agency to oversee the entire stock market. Some thought it should be the Securities and Exchange Commission, while others opted for the Federal Reserve Board. Brady also recommended greater cooperation between the exchanges and a greater amount of disclosure of information. All these recommendations were adopted, with the Federal Reserve Board being assigned the task of oversight. 787

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Bargain hunters bought many of the stocks that had fallen in price, aiding recovery of the market. Overall, losses were largely erased within two years of the crash. A smaller crash occurred in 1989, but share prices recovered and the DJIA soon flirted with the 3,000 level. Bibliography Bose, Mihir. The Crash: Fundamental Flaws Which Caused the 1987-8 World Stock Market Slump and What They Mean for Future Financial Stability. London: Bloomsbury, 1988. Valuable for insights regarding the interrelations of world financial markets. Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Kamphuis, Robert W., et al., eds. Black Monday and the Future of Financial Markets. Homewood, Ill.: Dow Jones Irwin, 1989. A scholarly, technical account of the crash along with an analysis of how future shocks can be prevented. Sobel, Robert. Panic on Wall Street. Rev. ed. New York: Dutton, 1988. A reissue of an earlier work on the history of financial panics, with a new chapter on the panic of 1987, stressing the differences between it and the 1929 crash. U.S. Congress. House. Committee on Banking, Finance, and Urban Affairs. Impact of the Stock Market Drop and Related Developments on Interest Rates, Banking, Monetary Policy, and Economic Stability. 100th Congress, 2d session, 1988. Discussion and analysis of the Brady Report. By the time of the hearings it had become evident that there would be no long-lasting effects of the crash, but the legislators did think in terms of reform. U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs. “Black Monday”: The Stock Market Crash of October 19, 1987. 100th Congress, 2d session, 1988. Congressional discussion and analysis of the Brady Report. Contains the text of the report. Wood, Christopher. Boom and Bust. New York: Atheneum, 1989. A journalistic account of the crash, its causes, and its aftermath. Robert Sobel Cross-References The Wall Street Journal Prints the Dow Jones Industrial Average (1897); The U.S. Stock Market Crashes on Black Tuesday (1929); The Securities Exchange Act Establishes the SEC (1934); Insider Trading Scandals Mar the Emerging Junk Bond Market (1986); Drexel and Michael Milken Are Charged with Insider Trading (1988). 788

DREXEL AND MICHAEL MILKEN ARE CHARGED WITH INSIDER TRADING Drexel and MichaelMilken Are Charged with Insider Trading

Categories of event: Finance and business practices Time: 1988 Locale: New York, New York In 1988, Drexel Burnham Lambert was charged with insider trading, beginning a chain of events that included the firm’s declaration of bankruptcy and incarceration of its star investment banker, Michael Milken Principal personages: Michael Milken (1946), the leading banker at Drexel Burnham Lambert, where he pioneered in the use of junk bonds to finance expansion of mid-sized companies. Frederick Joseph (1937), the chief executive officer of Drexel Rudolph Giuliani (1944), the prosecutor most closely associated with insider trading cases Ivan Boesky (1937), a financier charged with insider trading Dennis Levine (1952), a Drexel banker who funneled inside information to Ivan Boesky Summary of Event During the 1970’s, the United States experienced inflation and economic stagnation. The prices of common stocks gyrated wildly but on average wound up about where they were in the late 1960’s. Meanwhile, earnings and dividends rose steadily. Because of inflation, the underlying values of many companies increased, but this was not reflected in the prices of their shares. Large firms often were worth less as ongoing businesses than their 789

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value if sold in pieces. This helped set the stage for hostile takeovers, in which Drexel Burnham Lambert became the leader. Drexel’s leadership and innovation in financing business dealings ultimately led to charges of illegal activity in December, 1988. Mid-sized companies whose bonds were not deemed of investment quality by rating services had difficulties raising money for expansion during the 1970’s and early 1980’s. Bank loans were difficult to obtain, and the companies had problems selling shares because many had not proved their performance and stockbrokers and analysts did not promote the companies’ stocks. Interest rates climbed, harming savings and loan companies (S&Ls), which were forbidden by law from paying rates for deposits that were high enough to be competitive. In the elevated rate environment, depositors withdrew money to invest at higher yields. By 1982, one out of every five S&Ls had failed. In response to problems in the industry, Congress passed the Deregulation Act of 1980 and the Garn-St. Germain Act of 1982, deregulating the S&Ls and permitting them to invest in commercial ventures that might be more profitable than mortgages, their traditional investment outlet. During the same period, insurance companies, attempting to win new customers, offered new products such as single-premium deferred insurance and guaranteed investment contracts that offered high, usually tax-deferred, returns. The combination of these factors had two major consequences: Many companies sought financing, and raiders looked for undervalued companies, hoping to take them over and carve them up for profits. Large numbers of people looked for and expected high yields. This set the stage for the activities of Drexel Burnham Lambert (commonly referred to as Drexel) and Michael Milken. Milken started as a bond salesman at Drexel in 1969, specializing in low-rated bonds. He was convinced that these bonds offered a tremendous opportunity. Many were “fallen angels,” bonds that were of investment grade when issued but whose companies had experienced reversals that resulted in downgrading of their debt. These bonds offered high yields, often more than compensating for the risk of default on them. Milken found customers in mutual funds, pension funds, insurance companies, and S&Ls, all of which wanted high yields to fulfill promises to their own customers or simply to survive. Milken’s assessment of these bonds was correct. The “fallen angel” junk bonds performed well as a group, and his department became the largest money-maker at Drexel. In 1977, Drexel started underwriting new issues of junk bonds, or bonds that were not rated as investment grade, and by the early 1980’s it was the 790

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leader in this area. In 1974, Frederick Joseph arrived at Drexel from Shearson Hayden Stone. He became Drexel’s chief executive officer (CEO) in 1985. Joseph had observed the rise of hostile takeovers through leveraged buyouts, or buyouts financed with debt, and realized that junk bonds might be used as means to take over large companies. Large profits could be made by individuals who had inside information regarding these raids. Those who knew of takeovers in advance could buy stock to sell once the takeovers became public knowledge and stock prices rose. Such trading, however, is illegal. Throughout the late 1980’s, when hostile takeovers and leveraged buyouts were fueling a major bull market, rumors circulated regarding them. At the same time, leaders of large corporations, realizing their security was threatened, lobbied in Congress for legislation to limit hostile takeovers and the issuance of junk bonds. Their most important organization in this effort was the Business Roundtable, comprising the CEOs of some of America’s largest companies. In 1986, it appeared that these activities would result in laws prohibiting or at least limiting the use of high-yield bonds in corporate takeovers. Had this been done, the hostile takeover movement would have ended. On May 12, 1986, while Congress debated several antitakeover bills, Drexel banker Dennis Levine was arrested on charges of insider trading in fifty-four stocks. Gary Lynch, chief of enforcement at the Securities and Exchange Commission, and U.S. Attorney Rudolph Giuliani offered Levine a plea bargain on the condition that he name his accomplices. Levine accepted, and on February 20, 1987, he was sentenced to two years in prison and a fine of $362,000. One of those implicated by Levine was Ivan Boesky. On November 14, 1986, Boesky pleaded guilty to securities fraud and agreed to assist in identifying and prosecuting other malefactors. On April 23, 1987, Boesky received a sentence of three years in prison. Giuliani went after other bankers, hoping to catch the “big one.” Given the nature of the market, that could be none other than Milken. In his operations, Giuliani utilized provisions of the Racketeer Influenced and Corrupt Organizations statute, known as RICO. This act, passed in 1970, was aimed at curbing activities of organized crime. Racketeering was defined as “fraud in the sale of securities, or the felonious manufacture, importation, receiving, concealment, buying, selling, or otherwise dealing in narcotic or other dangerous drugs, punishable under any law of the United States.” The penalties were harsh. Even if a business were run legitimately, it could be confiscated if purchased with illegally obtained money. In civil cases, treble damages could be levied. Funds and property could be seized before trial of those accused of RICO violations, presum791

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ably to prevent those assets from being hidden and protected from later seizure as penalties or fines. On August 4, 1988, RICO was used against Princeton/Newport Partners, one of whose bankers was named by Boesky. The bank collapsed in December, and all the defendants were convicted on August 2, 1989. The conviction was overturned the following June, and two years later the government dropped the case. In 1988, Giuliani turned on Drexel. In mid-December, he told Joseph that he would indict the company on RICO charges unless it agreed to a settlement. The company had no choice but to bow, since seizure of its assets as allowed by RICO would have ruined it. On December 26, it agreed not to contest charges, to pay $650 million in fines and restitution, and to accept outside management. In addition, it would place Milken on leave of absence and withhold $200 million of his earnings. On February 13, 1989, after being denied assistance, Drexel filed for bankruptcy. Milken had formed a new company, International Capital Access Group (ICAG), which was intended to finance minority-owned businesses, unions, and Third World countries. ICAG had many clients eager to utilize Milken’s expertise and contacts. In one daring plan, Milken attempted to have Japanese firms pay the debt Mexico owed the United States, in return for which they would obtain a free trade zone in Mexico from which to export to the United States. This deal fell through. After protracted negotiations, on April 20, 1990, Milken agreed to plead guilty to six felony charges, none of which involved insider trading, bribery, racketeering, or manipulating the prices of stocks, the key elements of Boesky’s plea bargain. He also agreed that after sentencing he would cooperate with the Justice Department. The government would not file additional criminal charges, but Milken remained subject to civil actions and criminal charges from other jurisdictions. Impact of Event Milken’s sentence included ten years in a federal penitentiary, eighteen hundred hours of community service a year for three years, and $200 million in fines. This was in addition to $400 million already extracted from him for a restitution fund. Later, there would be an additional $500 million fine to settle anticipated legal actions, which numbered more than 150. By the end of 1989, it seemed that the junk bond market had ended, as a result of the decline of customers and clients. Congress passed the Financial Institutions Rescue, Recovery, and Enforcement Act (FIRREA) in August, 1989, requiring S&Ls to redo their financial statements to reflect the current market values of any junk bonds that they held, a process called “marking 792

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to market.” Many S&Ls showed large accounting losses because of marking to market. In addition, S&Ls were required to sell their junk bond portfolios by August, 1994. S&Ls held about 6 percent of all junk bonds, so the forced sale was expected to lower prices substantially. The thrifts were prohibited from purchasing junk bonds as well, removing a major player in that market. Almost at once, the thrifts started liquidating their portfolios. The losses involved caused several to file for bankruptcy. New York ruled that state pension funds no longer could invest in junk bonds, and California declared that its pension funds would sell off its junk holdings, with face value of $530 million, for $380 million. The Resolution Trust Corporation (RTC), a government agency created to deal with insolvent thrifts, had seized the assets of many of them and was selling junk bonds. It soon had dumped $5 billion in bonds on the market. The SEC ruled that as of May, 1991, no more than 5 percent of the assets of money market funds could be dedicated to unrated or low-rated commercial paper. Previously, the figure had been 25 percent. This did not result in panic selling, but it did dry up another market for junk bonds. Most seriously, insurance companies, a prime junk customer, were told by the National Association of Insurance Commissioners to limit junk holdings and were required to establish reserves against such investments. Thus many of the major buyers of junk bonds were removed from the market. There were several failures of corporations which had large junk issues outstanding. This led to price declines for the bonds, reflected in the share prices of high-yield mutual funds. Declining share prices led to massive redemptions. The funds sold junk bonds to pay for redeemed shares, further depressing the market. The hostile takeover movement came to an end in the wake of the collapse of the junk bond market. Unable to obtain backing, the raiders disappeared. The panic selling in the junk bond market turned out to be overdone. Bargain hunters appeared, and new high-yield mutual funds were organized to capitalize on the situation. Leon Black, one of Milken’s chief aides, was one of the more sophisticated individuals in this market, picking up hastily sold portfolios and making more money at it in the 1990’s than he had when dealing in junk bonds during the 1980’s. Merrill Lynch and Goldman Sachs led the way in the new creation of junk, most of which was used in restructurings or was issued for mid-sized companies. In 1986, a record $31.9 billion in junk had been sold before placements declined. In 1990, $1.4 billion was taken to market. In 1991, the price of junk rose sharply, and demand reappeared. More than $40 billion in junk was sold that year, and slightly less than $38 billion was sold in 1992. Junk was the best-performing financial asset in 1991 and close to the 793

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top in 1992. By then, some critics wondered whether any of Drexel’s transgressions merited the destruction of a firm that had employed seven thousand workers. Milken entered prison at Pleasanton, California, on March 4, 1991. On August 5, 1992, after Milken had served seventeen months, Judge Kimba Wood announced that she was reducing his sentence to thirty-three months. He was released on January 2, 1993, and so served twenty-two months. Initially he went to a halfway house and worked for his attorney, Richard Sandler. On February 4, he was permitted to return home. The reductions in his prison term were for cooperation with the government, but in fact Milken had not cooperated. The sharp reduction in prison time was taken by Milken’s defenders as a tacit admission that the crimes to which he had pleaded guilty had not merited so harsh a sentence. The government had gone after Milken in part to stop hostile takeovers, which endangered the security of leaders of large, mismanaged companies. With the end of hostile takeovers, such individuals felt more secure, but the security did not last. Large pension and trust funds introduced measures to limit salaries and bonuses, indicating displeasure with executives who appeared to place their own interests above those of the corporation. Even though takeovers were rare, the threat of them encouraged managements to be more responsive to shareholders. Managerial responsibility should be counted as one legacy of the junk bond revolution. Bibliography Bailey, Fenton. Fall from Grace: The Untold Story of Michael Milken. New York: Birch Lane Press, 1991. Generally sympathetic to Milken, written with his cooperation. Bainbridge, Stephen M. Securities Law: Insider Trading. New York: Foundation Press, 1999. Bruck, Connie. The Predators’ Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. New York: Simon & Schuster, 1988. The first of the books on Drexel Burnham Lambert, one that the company attempted to suppress. Critical of the company. Johnston, Moira. Takeover: The New Wall Street Warriors, the Men, the Money, the Impact. New York: Arbor House, 1986. The best book on the merger mania of the mid-1980’s, but written before the biggest and most important deals were concluded. Katz, Leo. Ill-Gotten Gains: Evasion, Blackmail, Fraud, and Kindred Puzzles of the Law. Chicago: University of Chicago Press, 1996. Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. New York: Morrow, 1992. A pro-Milken book, written with his 794

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cooperation. Strong on Milken’s personality and the trial, weak on an understanding of how investment banking is conducted. Levine, Dennis B. Inside Out: An Insider’s Account of Wall Street. New York: G. P. Putnam’s Sons, 1991. A self-serving work by the banker whose arrest set off the trail of indictments that led to the destruction of Drexel. Madrick, Jeff. Taking America: How We Got from the First Hostile Takeover to Megamergers, Corporate Raiding, and Scandal. New York: Holt, Rinehart & Winston, 1987. A journalistic account of the merger movement, tending toward the sensational. Smith, Roy C. The Money Wars. New York: Dutton, 1990. A clear and informed study of the takeover movement, with special attention to Drexel. Sobel, Robert. Dangerous Dreamers. New York: Wiley, 1993. An attempt to place the merger movement in the perspective of post-World War II markets, concentrating on the merger movement and the sources of Milken’s ideas and activities. Stewart, James B. Den of Thieves. New York: Simon & Schuster, 1991. A contentious best-seller about the decline of Drexel and Milken, apparently based on leaks from the SEC and the U.S. attorney’s office. Yago, Glenn. Junk Bonds: How High Yield Securities Restructured Corporate America. New York: Oxford University Press, 1990. A scholarly defense of the use of junk bonds in corporate creation and takeovers, by one of the more prominent Milken defenders. Robert Sobel Cross-References Congress Deregulates Banks and Savings and Loans (1980-1982); Insider Trading Scandals Mar the Emerging Junk Bond Market (1986); Bush Responds to the Savings and Loan Crisis (1989).

795

MEXICO RENEGOTIATES DEBT TO U.S. BANKS Mexico Renegoti ates Debt to U.S . Banks

Category of event: Finance Time: 1989 Locale: Washington, D.C. Government pressure on U.S. banks to renegotiate Mexico’s debt led to the Brady debt reduction plan Principal personages: Nicholas F. Brady (1930), the United States secretary of the treasury, 1988-1992 Carlos Salinas de Gotari (1948), the president of Mexico beginning in 1988 James Baker III (1930), the United States secretary of the treasury, 1985-1988 Summary of Event Banks located in major financial centers of the world participated in an expansion of international lending in the 1970’s. Loans to less developed countries (LDCs) were the fastest growing category of international bank loans. A combination of sharply increased bills for oil imports and a recession in the industrial countries that cut into the LDCs’ export earnings, compounded by unrealistic exchange rate policies, sharply raised these countries’ aggregate balance of payments deficits from an annual average of about $7 billion in the 1970-1973 period to $21 billion in 1974 and $31 billion in 1975. Banks were replete with funds and faced declining domestic loan demand. They were thus willing and able to provide financing in the form of direct government loans and development financing. Bank lending to LDCs continued to grow rapidly during the early 1980’s. In the summer of 1982, however, international financial markets were shaken when a 796

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number of developing countries found themselves unable to meet payments to major banks around the world on debt amounting to several hundred billion dollars. With the onset of the debt crisis, lending to LDCs dried up rapidly. Several developments set the stage. One of these was a growing trend in overseas lending to set interest rates on a floating basis, rather than fixing an interest rate for the life of the loan. Floating rate loans made borrowers vulnerable to increases in real interest rates as well as to increases in the real value of the dollar, because most of these loans were in dollars. A second development was the oil price increase implemented by the Organization of Petroleum Exporting Countries (OPEC) in 1979. In the absence of policies that promoted rapid adjustments to this new shock, the LDCs’balance of payments deficits soared to $62 billion in 1980 and $67 billion in 1981. The deficits increased the LDCs’ need for external financing, and banks responded by increasing the flow of loans to the LDCs to $39 billion in 1980 and to $40 billion in 1981. Interest rates increased at the same time. The variable interest rates of the loans combined with increased indebtedness boosted the LDCs’net interest payments to banks from $11 billion in 1978 to $44 billion in 1982. The final element setting the stage for the crisis was the onset of the recession in industrial countries. The recession reduced the demand for the LDCs’products and thus the export earnings needed to service their bank debt. The first major blow to the international banking system came in August, 1982, when Mexico announced that it was unable to meet its regularly scheduled payments to international creditors. Shortly thereafter, Brazil and Argentina found themselves in a similar situation. By the spring of 1983, about twenty-five LDCs were unable to meet their debt payments as scheduled and had entered into loan rescheduling negotiations with creditor banks. By late 1983, the intensity of the international debt crisis began to ease as the world’s economic activity picked up, boosting the LDCs’ export earnings. In October of 1985, United States Treasury Secretary James Baker III called on fifteen principal middle-income debtor LDCs to undertake growth-oriented structural reforms that would be supported by increased financing from the World Bank, continued modest lending from commercial banks, and a pledge by industrial nations to open their markets to LDC exports. By 1989, most of the fifteen nations were behind in delivering on promised policy changes and economic performance. Citicorp and other banks added to their reserves against losses from loans and put themselves in a stronger position to demand reforms in countries to which they had loaned money. During the late 1980’s, recognizing the deteriorating financial situation, 797

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Mexico’s President Carlos Salinas de Gotari undertook programs to turn the economy around. Mexico cut its budget deficit by 20 percent, to 13 percent of gross domestic product, between 1987 and 1988. The government also sold into private hands two-thirds of the twelve hundred businesses it owned and obtained concessions from labor and business to help control inflation. In 1989, the inflation rate was reduced to 20 percent, down from 160 percent in 1987. Mexico opened its doors to foreign competition through trade liberalization policies. These changes did not occur without costs. The Mexican infrastructure suffered. Cutbacks in investment in public services, roads, telecommunications, and electrical systems led to deterioration. Salinas needed both private and public sources to provide stable jobs to attack the poverty level and develop the infrastructure. Mexico could not pay its $10 billion a year in loan payments and also finance growth. Repayments of principal and interest added up to 6.5 percent of the country’s gross domestic product. Something had to be done. In 1989, Nicholas Brady, the treasury secretary, put forth a new plan to replace the Baker Plan. It emphasized debt relief through forgiveness instead of new lending. It would cover $54 billion of Mexico’s $69 billion debt to foreign banks. On July 23, 1989, an agreement was reached by Mexico and the fifteen-bank committee representing the country’s five hundred bank creditors. Under the terms of the agreement, banks could choose to swap old loans for thirty-year bonds at a 35 percent discount of face value. These bonds paid interest at the same rate as the old loans, 13⁄16 of a percentage point over the London Interbank Offered Rate. Another option was to swap old loans for thirty-year bonds with the same face value. These bonds would pay a fixed interest rate of 6.25 percent, much lower than the prevailing rate. The last option was to lend new money or reinvest interest received from Mexico for four years in an amount equal to onefourth of their current medium- and long-term exposure. The interest on the new bonds would be guaranteed for at least eighteen months. The bonds’ principal would be secured by a zero-coupon Treasury bond financed by the International Monetary Fund, the World Bank, Mexico, and Japan. For the Brady Plan to work, commercial banks had to both make new loans and write off existing loans. Impact of Event Banks accounting for only 10 percent of Mexico’s debt chose to make new loans, less than was predicted. The designers of the plan also thought that most banks would prefer to cut the face value of the loans rather than reduce interest rates, but this too did not come to pass. Instead, many banks used the Brady Plan as an opportunity to exit the LDC debt market. These 798

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outcomes led to a $300 million shortage and the need for Mexico to contribute an additional $100 million and renegotiate the loan terms. Originally, the banks required that cash be made available immediately to pay eighteen months worth of interest, but because of the shortfall, they agreed to take the money in eighteen months rather than immediately. Although the plan did not completely resolve Mexico’s debt problems, it was a step in the right direction. It allowed President Salinas to begin programs to rebuild Mexico’s infrastructure and provided relief from interest payments that was necessary for the Mexican economy to stabilize and gain economic footing. If any country had earned the reduction in debt, it was Mexico. Salinas was committed to free market policies and to opening the economy. Even while asking for help from abroad, Mexico was working to solve its own problems. The message to other countries facing similar debt servicing problems was to emulate Mexico by cutting government waste, liberalizing the economy, and joining the international trading system, and then ask about debt relief. Mexico provides just one example of the extent of the debt problems experienced by Latin American countries in 1989. The hyperinflation existing in Argentina, Brazil, and Peru, and the political instability in Latin America in general, threatened already-fragile political and economic conditions. Many countries found themselves far behind on their debt payments. Debtor nations such as Argentina, Bolivia, Costa Rica, the Dominican Republic, Ecuador, Brazil, Venezuela, Honduras, and Peru needed economic breathing room to impose reforms. Mexican relief was only the tip of the iceberg. Latin America continued to account for the world’s biggest debt problems but showed several of the most promising turnarounds. The sixteen major borrowers there owed a total of $420 billion in 1991, slightly more than half of that to banks. Brazil, the largest borrower in the developing world, remained a problem. Its debt came to $122.6 billion in 1991, $80 billion of it owed to banks. It suspended all debt payments in 1989 and agreed reluctantly in March of 1991 to start paying back a portion of its $8 billion in arrears. In Peru, bankers virtually abandoned hope of getting back the $8.6 billion owed to them. In 1991, Peru’s debt certificates sold at 4 percent of their face value. The good news was that some countries, notably Colombia, never rescheduled their payments. Chile, through the use of a creditor swap, cut its bank debt by 40 percent. Argentina, a slow payer, began a debt-equity swap program to help cut the cost on its $34 billion debt. The Brady Plan proved to be helpful to several countries, Mexico being 799

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the first. It ended the game in which banks kept lending new money that countries used to pay interest on old debts. “Brady Bonds” were thirty-year bonds guaranteed by a zero-coupon bond from the United States Treasury. The interest was backed by the World Bank. Brady Bonds helped Mexico, Costa Rica, and Venezuela reduce their debt and proved to be easier to sell than the original bank loans. Trading in loans to LDCs climbed from $200 million in 1982 to more than $100 billion in 1990, showing that the market for Third World sovereign debt was becoming more liquid. After years of problems from Latin American government debtors, United States banks finally got some return. Sounder economic policies in Mexico, Argentina, Venezuela, and some other Latin American countries bolstered the value of their outstanding debt, easing the pressure on banks holding loans. The market for LDC debt remained fragile, with buyers continuing to demand steep discounts from face value. The market could not absorb all the loans that banks wanted to sell, but the debt crisis of the 1970’s and 1980’s appeared to have lessened. During the early 1980’s, a widespread fear was that countries that had piled up substantial international debt, such as those in Latin America, would find their economies crushed by the pressure of loan payments. Defaults on loans would bring down big banks and cause a financial crisis in lender nations. One by one, however, the Latin American countries negotiated agreements under which their creditors agreed to accept smaller repayments; the countries in return enacted economic reforms. Steps to control inflation and open up foreign investments were taken. In July of 1992, Brazil, the biggest Third World debtor and a holdout on renegotiating, worked out an arrangement with nineteen banks representing private creditors. The Brady Plan and Mexico’s debt restructuring provided a beginning. Cooperation between banks and governments softened the debt crisis. Bibliography Chambliss, Lauren, and James Srodes. “Mexico: How to Break the Mexican Debt Impasse Before It’s Too Late.” Financial World 158 (July 25, 1989): 18-21. This article gives an excellent review of the changes that took place under President Salinas in Mexico. It discusses the various economic and political changes that led to the improved Mexican economy and finally to the willingness of banks to renegotiate the terms of Mexican debt. Finn, Edwin A., Jr. “Giving a Little to Save a Lot.” Forbes 143 (March 6, 1989): 38-39. Discusses the plan proposed by Secretary of the Treasury James Baker III. Salinas’ efforts to work on the debt relief proposal are also included. A good article to set the stage for the Brady Plan. 800

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Hughes, Jonathan R. T. American Economy History. 5th ed. Reading, Mass.: Addison-Wesley, 1998. Main, Jeremy. “A Latin Debt Plan That Might Work.” Fortune 119 (April 24, 1989): 205-212. Sets out the details of the Brady Plan, the history behind its development, and the reactions it caused from the bankers involved and Mexico’s president. O’Reilly, Brian. “Cooling Down the World Debt Bomb.” Fortune 123 (May 20, 1991): 122-124. An excellent article to put the Latin American debt crisis in perspective. It was written long enough after Mexico’s debt restructuring that the results and impact of the Brady Plan can be assessed. Sachs, Jeffrey. “Robbin’ Hoods.” The New Republic 200 (March 13, 1989): 16. Discusses the various ways that banks have in the past approached the idea of restructuring debt. Offers insights into how the Brady Plan differed from previous attempts at debt relief. Patricia C. Matthews Cross-References Congress Deregulates Banks and Savings and Loans (1980-1982); The Immigration Reform and Control Act Is Signed into Law (1986); Bush Responds to the Savings and Loan Crisis (1989); The North American Free Trade Agreement Goes into Effect (1994).

801

BUSH RESPONDS TO THE SAVINGS AND LOAN CRISIS Bush Responds to the Savings and Loan Crisis

Categories of event: Government and business; finance Time: August 9, 1989 Locale: Washington, D.C. The Financial Institutions Rescue, Recovery, and Enforcement Act of 1989 was passed to bail out the savings and loan industry and to strengthen its regulatory standards Principal personages: George Bush (1924), the president of the United States, 19891993 Richard C. Breeden (1949), the executive director of the White House Regulatory Task Force, 1989 L. William Seidman (1921), the chairman of the Federal Deposit Insurance Corporation, 1985-1991 Danny M. Wall (1939), the chairman of the Federal Home Loan Bank Board, 1987-1989, and the director of the Office of Thrift Supervision, 1989-1990 Summary of Event On August 9, 1989, President George Bush signed into law the longawaited legislation designed to stem the stream of losses in the savings and loan industry. The Financial Institutions Rescue, Recovery, and Enforcement Act (FIRREA) had four explicit goals. The first was to improve the ability of regulators to supervise savings institutions by strengthening industry capital and accounting standards. The second was to return the federal deposit insurance fund to a sound financial base. The third was to provide funds to deal with the disposal of failed institutions. The fourth was to strengthen the enforcement ability of regulators through reconfigured 802

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powers and a new organizational structure. An unstated goal of FIRREA was to return the emphasis of the business to its roots of home mortgage lending. Savings institutions had enjoyed more than fifty years of economic success. By the end of the 1970’s, however, industry prosperity was threatened by unprecedented high inflation and interest rates. The financial structure of the typical thrift was at the core of the problem. Most institutions borrowed for short terms, in the form of depositors’savings President George Bush. (Library of Congress) accounts, but lent for long terms through fixed-rate home mortgages. While interest rates remained stable, thrifts could earn acceptable profits. When market forces caused rates to soar, the delicate balance was threatened, as payments to depositors rose without a corresponding increase in receipts from mortgages. In 1978, regulators allowed thrifts to pay higher interest rates on certificates of deposit. This checked disintermediation (savers going to other institutions), but the cost of funds rose. Profits, therefore, shrank or turned into losses. Thrift executives knew that erosion of net worth jeopardized the industry’s health. They sought relief from long-term, fixed-rate loans that tied them to low returns. The U.S. Congress was not prepared to back an industrywide bailout. As a compromise, it passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) in 1980, granting additional lending powers to thrifts. Most promising was the ability to originate short-term consumer loans and high-yield commercial real estate loans. Despite DIDMCA, about 36 percent of all thrifts were losing money by the end of 1980. Even worse, in 1981 about 80 percent of the industry lost money. Congress reacted with additional deregulation in 1982. It passed the Garn-St. Germain Act, giving thrifts even broader investment powers. The government also allowed thrifts favorable reporting treatment. Purchasers of failing institutions were given special accounting privileges. In addition, thrifts were authorized by the Federal Home Loan Bank Board 803

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(FHLBB) to utilize lenient Regulatory Accounting Principles (RAP). Moreover, the FHLBB allowed thrifts to reduce their capital requirements from 5 percent to 3 percent between 1980 and 1982. This leniency was allowed to keep troubled thrifts from being taken over by regulators. After deregulation, and with interest rates subsiding in 1983, the industry appeared to be heading toward prosperity. Thrifts attempted to grow out of their problems by generating more high-yield investments. The real estate market was booming, so thrift managers were tempted to invest in risky commercial ventures. They often disregarded such factors as lack of expertise, unfamiliar geographic territories, and questionable appraisals and underwriting. Loan brokers and junk bond brokers also found an eager market in the thrift industry. Depositors continued to patronize savings institutions despite growing losses and failures. DIDMCA had increased deposit insurance coverage to $100,000. With this level of insurance, depositors had little fear of losing their savings at faltering institutions. Indeed, the failing institutions often offered the highest rates. In 1986, the Tax Reform Act was passed. This repealed liberal depreciation and personal deduction provisions. Many commercial real estate deals were structured around such tax shelters. Without them, the enormous market for real estate syndicates dried up. At the same time, worldwide oil prices dropped. This negatively affected the economic health of states that relied on the oil industry. The real estate market in the Southwest went sour almost overnight, affecting real estate values throughout the country. The booming real estate market of 1983-1986 was transformed into an overbuilt market by 1987. The FHLBB committed nearly $40 billion in 1988 to take over failing institutions, merge them into marketable packages, and sell them to investors. This program almost bankrupted the Federal Savings and Loan Insurance Corporation (FSLIC). FHLBB Chairman Danny C. Wall either concealed the depths of the FSLIC insolvency or did not recognize the extent of the problem. Matters were made worse by errors in judgment on the part of thrift managers, the greed of investors, weak examination and supervision practices by regulators, and numerous alleged cases of fraud and misconduct on the part of thrift insiders, regulators, investors, and members of Congress. In this environment, George Bush took over the presidency in 1989. He was extremely concerned about the unstable condition of the FSLIC and the accumulated losses at hundreds of thrifts. A draft of a new law came out of the White House in February, 1989. Three people were primarily responsible for this proposal. Richard C. Breeden took the lead in Bush’s efforts 804

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on the thrift crisis as executive director of the White House Regulatory Task Force. Breeden was assisted by Robert R. Glauber, an undersecretary in the Treasury Department. The senior member of this effort was L. William Seidman, chairman of the Federal Deposit Insurance Corporation (FDIC), which insured the commercial banking industry. In August, 1989, the act was approved by Congress. President Bush signed FIRREA into law a few days later. FIRREA featured several key provisions. It dissolved both the FSLIC and the FHLBB. The responsibility of insuring the thrift industry’s deposits reverted to the FDIC. The duty of supervising the Federal Home Loan Bank (FHLB) system and individual thrifts was passed to a new organization, the Office of Thrift Supervision (OTS). Danny Wall was appointed director of the OTS. Two new additional organizations were created. The Resolution Trust Corporation (RTC) was formed to dispose of the assets of failed thrifts. Seidman, as FDIC chairman, became chairman of the RTC. The Resolution Funding Corporation (RFC) was created as the fund-raiser for the RTC. The RFC was initially authorized to borrow up to $50 billion, through bonds, to fund RTC activities. Numerous thrift powers were restructured. FIRREA banned investment in junk bonds, limited investment in nonresidential loans, set loan-to-oneborrower limits to national bank levels, and placed strict limitations on loans to affiliated parties. Most important, it mandated that thrifts hold at least 70 percent of their assets in mortgage-related investments. Penalties for failure to comply were tough at both the corporate and the individual levels. FIRREA directed the OTS to set capital requirements for thrifts at levels no less stringent than those of national banks. Core capital requirements were set at 3 percent of total assets, and tangible capital was set at 1.5 percent of total assets. Thus, the definition of capital itself was altered. The previous reliance on RAP standards of accounting was abolished. President Bush’s stated intention was to fix the thrift industry permanently by closing down or selling hundreds of thrifts. His method of ensuring that old problems would not resurface was to subject surviving thrifts to the capital and accounting rules applied to national banks. Impact of Event FIRREA was a sharp response to the thrift crisis. Opinions differed as to whether this harshness was required to return the industry’s profitability or whether it was punitive action for perceived transgressions. Considerable controversy arose in the business community, especially among the thrifts that were directly affected. 805

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Some analysts believed that the capital requirements would bankrupt more institutions than necessary. There was a large group of thrifts working slowly to recover from their problems. They were not grossly insolvent but would not be able to meet new capital requirements for years. Continued weaknesses within the real estate markets did not help. Imposing stringent standards on a weakened industry pushed hundreds of these thrifts over the brink. This presented the RTC with a larger, more expensive task than the government had expected. The short-run impact of FIRREA on the business community extended further than the thrift industry. FIRREA caused all lending institutions to tighten credit practices, so businesses had to postpone or cancel worthy projects. Tight credit contributed to a recessionary economic climate. Banking regulators tightened oversight and enforcement in their industry. Although inflation and interest rates were in check, banking became more conservative. Many banks were satisfied to watch profit margins improve through lower costs of funds. The resulting “credit crunch” contributed to job losses throughout the economy. Closings and mergers within the thrift industry meant an additional dramatic drop in jobs. By the end of September, 1991, the OTS estimated that 464 thrifts (21 percent of the industry) were on the brink of takeover. These institutions had not been seized because there was no money available to do so. The OTS intended to take over all failing institutions and have the RTC either sell them intact or liquidate them piecemeal. To dispose of a thrift intact, the RTC had to make up any negative net worth. The goal was to entice investors, especially commercial banks, to purchase failing thrifts through the financial backing of bonds issued by the RTC/RFC. Unfortunately, FIRREA stripped thrifts of many powers that had made them attractive investments. Unless a thrift could open new depository markets for a bank, it did not offer much advantage to the prospective purchaser. FIRREA’s objective of making depository insurance financially sound also failed to be met. FIRREA did not correct the problems that existed in the FSLIC; it merely pushed the problems onto the FDIC, jeopardizing its solvency. Because the $100,000 insurance coverage was not changed, depositors and institutions remained susceptible to risk-taking. Since fixed insurance premiums were not changed, risky institutions were afforded the same degree of protection at the same cost as safe institutions. Resolving the thrift crisis involved huge federal payments to honor commitments made by the FSLIC and new ones resulting from FIRREA. A substantial amount of the borrowing was to be repaid from the sale of assets of failed thrifts. Unfortunately, asset sales could not cover the large borrowings. This shortfall became the responsibility of taxpayers. Like the national 806

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debt, the FIRREA debt will likely fall on future generations of taxpayers. Several lessons emerged from FIRREA and the events that led to its passage. First, deregulation in the early 1980’s seemed to hamper thrift industry efforts to reverse losses. More lenient rules and broadened powers were not accompanied by stricter supervision. Second, the deposit insurance system encouraged carelessness on the part of depositors and depository institutions. Fixed-price premiums ignored risk and transgressed the cardinal rules of insurance. Third, FIRREA may have been based on sound intentions, but the effect was similar to that of overmedication of a sickly patient. Good principles applied abruptly may have led the industry toward extinction. Fourth, an improperly funded program cannot expect success. FIRREA was more ambitious than its budget would allow. The final costs may not be known for generations. Bibliography Calavita, Kitty, Henry N. Pontell, and Robert H. Tillman. Big Money Crime: Fraud and Politics in the Savings and Loan Crisis. Berkeley: University of California Press, 1997. Bush, Vanessa, and Katherine Morrall. “The Business Reviews a New Script.” Savings Institutions 110 (October, 1989): 30-35. Presents a thorough yet concise overview of the specific provisions of FIRREA. Summarizes in chart form the restructured powers, regulatory reorganization, and objectives of the legislation. Highly recommended. Lowy, Martin E. High Rollers: Inside the Savings and Loan Debacle. New York: Praeger, 1991. Highly recommended reading for a detailed understanding of the factors that caused the thrift crisis. Despite the title, commentary is not excessive; a balanced approach is used. Offers suggestions for improvement of the industry’s health. Mayer, Martin. The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry. New York: Charles Scribner’s Sons, 1990. A thorough review of causal factors in the savings and loan crisis. Emphasizes the role of key persons involved, placing blame and making accusations of wrongdoing. Interesting and informative to the reader who recognizes the point of view of the text. Pilzer, Paul Z., and Robert Deitz. Other People’s Money: The Inside Story of the S and L Mess. New York: Simon & Schuster, 1989. Emphasizes the effects of greed, mismanagement, and illegal practices on the thrift problem. Examines the growth of problems in the Southwest and the effects on the industry overall. Offers suggested solutions. United States. Congressional Budget Office. The Economic Effects of the Savings and Loan Crisis. Washington, D.C.: Author, 1992. A Congres807

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sional Budget Office study that focuses on the role of the deposit insurance system in the savings and loan crisis. Explores how the problem originated but stresses the ramifications of thrift losses. Examines the future effects on the economy and fiscal policy. Victor J. LaPorte, Jr. Cross-References The Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy (1964); Congress Deregulates Banks and Savings and Loans (1980-1982); Federal Regulators Authorize Adjustable-Rate Mortgages (1981).

808

SONY PURCHASES COLUMBIA PICTURES Sony Purchases Columbia Pictures

Category of event: Mergers and acquisitions Time: September, 1989 Locale: New York, New York The purchase of a major film studio by a Japanese corporation accentuated fears of a Japanese takeover of American business Principal personages: Akio Morita (1921-1999), a Japanese physicist and engineer who cofounded the Sony electronics company and became its chief executive Michael Schulhof (1942), an American physicist and businessman who became vice chairman of Sony USA and who engineered the purchase of Columbia Pictures Norio Ohga (1930), a Japanese musician and businessman who became chairman of Sony USA and second in command of Sony Corporation Jon Peters (1947), a film producer who took charge of Columbia Pictures after the acquisition by Sony Peter Guber (1942), a film producer who became chairman and chief executive officer of Sony Pictures Entertainment Summary of Event The purchase of Columbia Pictures in September, 1989, was one part of a business strategy intended to make Sony Corporation of Japan a multimedia entertainment empire. Sony had purchased CBS Records in 1988 and went on to acquire several software publishing companies in 1990 and 1991. The Sony Software Corporation was created in 1991 to oversee the record business (renamed Sony Music Entertainment), Columbia Pictures, 809

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Digital Audio Disc Corporation (a manufacturer of compact discs), Sony Electronic Publishing, and the SVS video distribution operation. The other branch of Sony USA was the Sony Corporation of America, a producer of electronic equipment, videotape, audiotape, semiconductors, and in-flight entertainment. Sony Corporation began life as the Tokyo Telecommunications Company in post-World War II Japan. It made electrical and electronic equipment for industrial, business, and home use. Its first great successes were in the field of home entertainment. Its transistor radios and magnetic tape recorders quickly established a reputation as affordable yet high-quality equipment incorporating the latest technology. In 1957, the company changed its name to Sony to reflect the importance of its Soni brand of audiotape to the company. The American market became enormously profitable for Sony, and the company’s audio equipment, radios, and televisions quickly established dominant positions in the home entertainment field. Sony remained committed to producing hardware, leaving the software—records, prerecorded tapes, and television shows—to other entities. A damaging and humiliating defeat over the format for videocassette recorders changed this strategy. Sony developed its U-matic magnetic video recorder in the 1960’s and sold it to institutional and business users in the early 1970’s. It followed this innovation with a videocassette player for home use, called the Betamax, which was introduced in 1976. Sony’s great rival in Japan, the Matsushita company, introduced a competing videocassette system called VHS. Although Sony had taken the lead in magnetic video recording technology and considered its Betamax technology superior to VHS, Matsushita convinced more manufacturers to adopt the VHS format. By the 1980’s, many film producers were releasing their products on VHS cassettes only. VHS beat Betamax in the marketplace because the majority of software producers released their programs in this format. Sony finally had to retreat from the Betamax format at great cost, but in the process the company learned a valuable lesson in the home entertainment field. Superior hardware alone is not sufficient to succeed in this market: It needs to be supported by software. One of the indications that the Sony Corporation was planning to expand in this direction was the appointment of Norio Ohga as president and chief executive. Ohga was neither a factory manager nor an engineer, but instead was a musician and conductor of international repute. In a company founded by two engineers, Akio Morita (the chairman of Sony Corporation) and Masaru Ibuka, and dominated by scientists, the choice of Ohga marked a significant break with past corporate culture. In the early 1980’s, Sony introduced a major innovation in audio tech810

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nology, the compact disc, which brought about a revolution in sound recording. In 1967, Sony had entered into a joint venture with CBS Records, one of the major record companies in the United States, to produce records. In 1988, Sony purchased CBS Records for $2 billion in the largest Japanese acquisition of an American company up to that time. As a leading producer of compact discs, Sony now had the manufacturing and artistic resources to provide music for its digital recordings. Sony was also a major producer of television sets and had invested heavily in new video technologies such as high definition television (HDTV) and 8 millimeter video recording. It soon began to look for a film and television studio to complement its well-established position in video technology. The vice chairman of Sony USA, Michael Schulhof, led the search. He had begun his business career at CBS Records, then moved to Sony and served on the CBS/Sony board. Schulhof had played the leading role in Sony’s acquisition of CBS Records. In his search for a film and television complement to acquire for Sony, he first courted MCA, an entertainment conglomerate that included Universal Pictures, the highly successful Universal Television, and record, music, and home video operations. Rebuffed by MCA’s chairman, Lew R. Wasserman, Sony next turned to Columbia. Columbia Pictures was created in the image of Harry Cohn, who cofounded the organization in 1920 and perfectly fitted the image of the mogul of the Golden Age of Hollywood in the 1930’s and 1940’s. By the 1980’s, Columbia Pictures had important production units in film and television. In 1982, the Coca-Cola Corporation bought Columbia Pictures for $750 million, beginning an uneasy union that ended in 1987 when Coca-Cola retreated from film production and Columbia Pictures Entertainment (CPE) was born. CPE had two major film studios (Columbia and Tri-Star), the Loew’s theater chain, a library of three thousand films, and some very successful television programs, including The Young and the Restless, Designing Women, and Married . . . With Children. This made it an attractive target for Sony, which offered to purchase the company for $3.4 billion in September, 1989. Impact of Event The news that Sony had bought a large film studio with a long history and strong image brought an immediate outcry in the American press. The American public interpreted the event not as a logical business strategy but as a glaring reminder of the power and ambition of Japanese companies. A survey carried out by Newsweek magazine and published in October, 1989, found that 43 percent of those surveyed believed that the acquisition was “a bad thing” for the United States. This was not the first Japanese incursion 811

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into American business; Sony and numerous other Japanese companies had been purchasing American companies for decades. Several Japanese electrical manufacturers had set up their own plants in the United States in the 1970’s and 1980’s. Some of the leading Japanese car manufacturers, such as Honda, had bought out American suppliers and built factories in the United States. None of these moves, however, generated the publicity and the criticism that followed Sony’s purchase of Columbia. Unlike an automobile factory or a software publishing company, a film studio has a highly visible public profile and a strong association with an industry that could be considered to be the quintessential American business. By buying Columbia Pictures, the Japanese were buying a piece of an industry founded on American technology, nurtured by American business, and part of the American Dream. Columbia, standing with the torch of liberty in her hand, was the corporate symbol of Columbia Pictures Entertainment and had meaning as a symbol of the United States itself. Many newspaper articles posed the question of Japanese censorship of films dealing with sensitive issues such as the attack on Pearl Harbor and Japanese war crimes. Several American films had been censored or banned in Japan because they dealt with these issues. Discussions of the acquisition in the United States Congress revealed that if Sony had been an American company there might have been an antitrust suit challenging the takeover. Sony Corporation not only bought CPE in this transaction but also hired two well-known film producers to run the organization. Peter Guber and Jon Peters had achieved great successes with films such as Batman (1989) and Rain Man (1988) and were considered to be the leading film producers in Hollywood at this time. Warner Communications had Guber and Peters under contract, and an acrimonious law suit followed their departure to Columbia. Sony paid a cash settlement to end the suit. The furor over the sale of Columbia had hardly settled down before Sony’s greatest rival made its move. Matsushita paid $6.6 billion for MCA in 1990 in a much bigger takeover than Sony’s buyout of CPE. Matsushita acquired Universal Pictures, Universal Television, MCA Home Video, MCA Records, a large number of film theaters, and numerous other holdings to make it the largest entertainment conglomerate in the world. Another public outcry followed this purchase. Matsushita diplomatically agreed that some parts of MCA, especially the food and lodging concessions at Yosemite National Park, should be sold to American buyers. The business and entertainment press maintained continuous scrutiny of the affairs of Columbia and MCA after the acquisitions to determine if Sony and Matsushita were keeping their promise not to impose a Japanese management style and Japanese decisions on the creative process of making 812

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films and television programs. Many analysts of the entertainment business believed that the Japanese companies had paid too high a price for their film studios and for the services of film producers and leading entertainers. Both Sony and Matsushita followed the policy of engaging well-known (and highly paid) talent for their entertainment divisions, banking on established stars of screen and recording rather than taking a chance on new talent. The short-term financial results of the acquisitions were very poor and gave substance to the viewpoint that the Japanese companies had made expensive forays into businesses in which they were unprepared to compete. Several Columbia films that were put into production at the time of the takeover were expensive failures, despite the big names associated with them. These included the 1991 releases of Hook, directed by Steven Spielberg and starring Robin Williams; Hudson Hawk, starring Bruce Willis; and Bugsy, starring Warren Beatty. On the other hand, Sony Music Entertainment scored some hits with artists such as Mariah Carey, New Kids on the Block, and Michael Bolton. The losses from film production, combined with poor sales of consumer electronics products, depressed Sony’s economic position in the first half of 1992. The company had incurred $1.2 billion in debt to buy Columbia and experienced difficulties generating enough revenue to maintain operations. The departure of Jon Peters in 1991 was another blow to the company. Guber remained to direct the renamed Sony Pictures Entertainment operation. By the end of 1992, the entertainment part of Sony USA returned a profit, and the entire company’s sales and profits posted an increase over the figures for 1991. Although the wisdom of the Japanese incursion into American show business remained in doubt, Sony and Matsushita maintained their strategy of acquiring software companies. Both moved into video production and computer software. Sony acquired the Carolco Pictures independent studios and a large interest in RCA-Columbia Pictures Home Video in 1991. It continued to make long-term contracts with high-profile media stars such as Michael Jackson. Sony had always been innovative in terms of developing new technology for its hardware, but in the software area it tended to be conservative and averse to risk. It introduced many dramatic new technologies in video and audio but did not produce innovative new music, films, or television shows in the first few years following the Columbia acquisition. In an industry in which financial success is usually the result of a small number of “blockbuster” films or record albums, creative decisions count for a great deal. Sony Software Corporation had yet to demonstrate that it was capable of identifying and exploiting new trends. 813

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Several large Japanese and European electronics manufacturers realized the benefits of creating fully integrated media empires and continued to acquire American companies involved in entertainment. The Dutch Phillips company, the French Pathe organization, and the Australian News Corporation all acquired significant holdings in the American entertainment and communications businesses. Bibliography Dick, Bernard F., ed. Columbia Pictures: Portrait of a Studio. Lexington: University Press of Kentucky, 1992. A collection of scholarly papers about the workings of this film studio. Assesses some of its famous motion pictures. The editor provides a concise business history of the company from its founding to 1991. Klein, Edward. “A Yen for Hollywood.” Vanity Fair 54 (September, 1991): 200-209. An account of Sony’s purchase of Columbia Pictures that incorporates it into Akio Morita’s management strategy. Highly critical of Sony’s strategy; gleefully relates the financial difficulties following the takeover. Mahar, Maggie. “Adventures in Wonderland.” Barron’s 71 (October, 1991): 8-12. Describes the management style of Michael Schulhof and the purchase of Columbia. Discusses the operation of the film studio under Sony management and analyzes the financial returns. Morita, Akio, with Edwin Reingold and Mitsuko Shimomura. Made in Japan: Akio Morita and Sony. New York: E. P. Dutton, 1986. A personal account of the rise of Sony from the 1940’s to the 1980’s. Although it does not contain information on the purchase of Columbia Pictures, it does outline Morita’s philosophy of business and gives insights into Sony’s overall strategy. As a personal account of one of the creators of Sony, this book often sinks into promotion of the company and Japanese culture. Nathan, John. Sony: The Private Life. Boston: Houghton Mifflin, 1999. Study of the inner workings of the giant corporation. Rothman, Andrea, and Ronald Grover. “Media Colossus.” Business Week, March 25, 1991, 64-68. An overview of Sony’s entertainment acquisitions in the United States, with a profile of Michael Schulhof. Concise description of Sony’s American operations, including a useful diagram of its corporate structure. Schlender, Brenton R. “How Sony Keeps the Magic Going.” Fortune 125 (February 24, 1992): 76-82. An up-to-date profile of Sony that describes its product line and operations. Contains the latest figures on revenue and profits. Andre Millard 814

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Cross-References The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); Cable Television Rises to Challenge Network Television (mid1990’s); Awarding of an NFL Franchise to Houston Raises the Ante in Professional Sports (1999).

815

BUSH SIGNS THE AMERICANS WITH DISABILITIES ACT OF 1990 Bush Signs the Americans with Disabilities Act of 1990

Category of event: Government and business Time: July 26, 1990 Locale: Washington, D.C. President George Bush signed into law the Americans with Disabilities Act, the world’s first comprehensive civil rights law for people with disabilities Principal personages: George Bush (1924), the president of the United States, 19891993 Tom Harkin (1939), a U.S. congressman from Iowa, 1974-1991 Tony Coelho (1942), a U.S. congressman from California, 19791989 Summary of Event On July 26, 1990, President George Bush signed into law the Americans with Disabilities Act (ADA), the world’s first comprehensive civil rights law directly aimed at protecting people with disabilities. The legislation was introduced in 1989 by Senator Tom Harkin (D-Iowa) and Congressman Tony Coelho (D-California). The primary purpose of the legislation was to ensure that disabled Americans, estimated to be up to forty-three million in number, would not be subjected to discrimination in employment, transportation, communications, public access, and other spheres of life. The law reinforces the fact that disabled Americans are full-fledged citizens and, as such, are entitled to legal protections that ensure them equal opportunity and access to the mainstream of American life. Section 106 of the ADA 816

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required that the Equal Employment Opportunity Commission (EEOC) issue substantive regulations implementing Title I of the act, regarding employment, within one year of enactment. The Department of Justice had responsibility for providing technical assistance for Title II, pertaining to nondiscrimination on the basis of disability in state and local government services, and substantive regulations for Title III, relating to nondiscrimination on the basis of disability by public accommodations and in commercial facilities.

President Bush signs the Americans with Disabilities Act on July 26, 1990, as representatives of the National Council on Disability and government agencies look on. (Joyce C. Naltchayan/The White House)

The employment provisions of Title I of the ADA apply to private employers, state and local governments, employment agencies, and labor unions. Employers with twenty-five or more employees were covered starting July 26, 1992, with employers with fifteen or more employees covered beginning July 26, 1994. The ADA prohibits discrimination in all employment practices, including job application procedures, hiring, firing, advancement, compensation, training, and other terms, conditions, and privileges of employment. Employment discrimination is prohibited against “qualified individuals with disabilities.” The ADA defines an “indi817

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vidual with a disability” as a person who has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or is regarded as having such an impairment. Impairments that limit major life activities include those that affect seeing, hearing, speaking, walking, breathing, performing manual tasks, learning, caring for oneself, and working. As such, individuals with epilepsy, paralysis, substantial hearing or visual impairment, mental retardation, or a learning disability are covered by the ADA. People with acquired immune deficiency syndrome (AIDS) and infected with human immunodeficiency virus (HIV) are also covered under the ADA. Individuals with minor, nonchronic conditions of short duration such as sprains, infections, or broken limbs are not covered. Users of illegal drugs also are not covered by the ADA. The ADA defines a “qualified individual with a disability” as a person who meets legitimate skill, experience, education, or other requirements of an employment position that he or she holds or seeks, and who can perform the “essential functions” of the position with or without reasonable accommodation. The ADA defines “reasonable accommodation” as a modification or an adjustment to a job or the work environment that will enable a qualified applicant or employee with a disability to perform essential job functions. Because the ADA specifically covers “qualified individuals with disabilities,” a job applicant may be subjected to inquiries, tests, or other selection devices, provided that the evaluations are job related, all applicants are subjected to the same evaluations, and an applicant’s disability does not prevent obtaining an accurate measure of qualifications. To ensure fair and accurate evaluation, the employer must identify and document the position requirements (skills, experience, and education) and essential functions of the job prior to recruiting applicants. These job descriptions must distinguish between essential and marginal job functions. Essential job functions are fundamental to successful performance of the job, as opposed to marginal job functions, which may be performed by particular incumbents at particular times but are incidental to the main purpose of the job. The ADA specifies consideration of several questions in determining whether each of the described job functions is essential. Specifically, does the position exist to perform the function? Would the removal of the function fundamentally alter the position? What is the degree of expertise or skill required to perform the function? How much of the employee’s time is spent performing the function? What are the consequences of failing to perform the function? How many other employees are available among whom the function can be distributed? 818

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If an applicant is qualified in terms of the position requirements but unable to perform one of the essential job functions because of a disability, the ADA requires that the employer make a “reasonable accommodation” unless it would result in “undue hardship.” “Undue hardship” means “significant difficulty or expense in, or resulting from, the provision of the accommodation.” This refers to “any accommodation that would be unduly costly, expensive, substantial, or disruptive, or that would fundamentally alter the nature or operation of the business.” According to the law, determining reasonable accommodation is an informal, interactive problemsolving process involving both the employer and the qualified individual with the disability. Examples of reasonable accommodation include making existing facilities used by employees readily accessible to and usable by an individual with a disability, restructuring a job, modifying work schedules, acquiring or modifying equipment, providing qualified readers or interpreters, or appropriately modifying examinations, training, or other programs. Employers, however, are not required to lower quality or quantity standards, nor are they obligated to provide items of personal use such as eyeglasses or hearing aids. The ADA allows a job offer to be conditioned on the results of a medical examination, provided that the examination is required for all entering

Title III of the Americans with Disabilities Act requires that new vehicles purchased by public transportation systems be accessible to persons with disabilities. (?)

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employees in the same job category regardless of disability and that the information obtained is handled according to confidentiality requirements specified in the act. The ADA does allow testing for use of illegal drugs, in that a test for illegal drugs is not considered a medical examination. Title II of the ADA stipulates that a public entity may not deny the benefits of its programs, activities, and services to individuals with disabilities because its facilities are inaccessible. A public entity does not, however, have to take any action that it can demonstrate would result in a fundamental alteration in the nature of its program or activity or cause undue financial and administrative burdens. Public entities were to achieve program accessibility by January 26, 1992. If structural changes were needed to achieve program accessibility, they were to be made as quickly as possible, but in no event later than January 26, 1995. Title II of the ADA also requires that all facilities designed, constructed, or altered by, on behalf of, or for the use of a public entity must be readily accessible by individuals with disabilities, if the construction or alteration was begun after January 26, 1992. A public entity must ensure that its communications with individuals with disabilities are as effective as communications with others. A public accommodation is required to make available appropriate auxiliary aids and services where necessary to ensure effective communications. These accommodations include provision of qualified interpreters, note takers, telephone handset amplifiers, telecommunications devices for deaf persons, audio recordings, and brailled materials. Title III of the ADA requires removal of physical barriers to the entrance and use of existing facilities. In addition, regulations require that new vehicles bought by public transit authorities be accessible to people with disabilities. The requirements include that all new fixed-route, public transit buses be accessible and that supplementary paratransit services be provided for those individuals with disabilities who cannot use fixed-route bus service. Impact of Event The Americans with Disabilities Act (ADA), signed into law by President George Bush on July 26, 1990, is a federal antidiscrimination statute designed to remove barriers that would prevent qualified individuals with disabilities from enjoying the same employment and accessibility opportunities available to persons without disabilities. The legislation affects not only state and local government but also places of public accommodation including more than five million private establishments such as restaurants, hotels, theaters, convention centers, retail stores, shopping centers, dry cleaners, laundromats, pharmacies, doctors’ offices, hospitals, museums, 820

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libraries, parks, zoos, amusement parks, private schools, day care centers, health spas, and sporting centers. The employment provisions of the ADA substantially increased regulation of employment practices, terms, and conditions affecting privileges of both state and local governments as well as millions of private enterprises. The ADA legislation covered employment applications, testing, hiring, assignments, evaluations, disciplinary actions, training, promotions, medical examinations, compensation, leave, benefits, layoffs, recalls, and termination practices. One consideration that the ADA failed to address was that of health insurance issues. Employers were left in a difficult situation in that the ADA does not provide relief for health care insurance costs for disabled Americans. Health insurance for the disabled is complicated by two issues. There are problems related both to the preexisting-condition clauses in group insurance programs and to who provides health care coverage for the disabled. Individuals who are congenitally disabled (from birth or from an early age, so that the individual has never worked) typically receive care through Social Security Insurance (SSI). People who have acquired a disability after working normally receive coverage through Social Security Disability Insurance (SSDI). Disabled persons covered by SSI who begin work may continue to receive services through SSI. These services typically are inferior to those received by other employees in the organization. Individuals covered by SSDI are entitled to benefits only during a nineteenmonth employment trial period. Once the trial period is over, the individual must either subscribe to the organization’s group health policy or assume the cost of the SSDI benefits, which cost approximately $200 per month in 1990. Another problem related to health care insurance is that people who have chronic illnesses or disabilities are vulnerable to clauses regarding preexisting conditions found in insurance policies. Such conditions often are not covered. Employers first have to investigate the benefits offered through SSI and SSDI and determine the length of coverage for disabled workers. Next, employers have to consult with their insurers and determine policies regarding preexisting-condition clauses as well as costs for potential additional required coverage for newly employed disabled workers. Another consideration raised by the ADA is the cost of providing reasonable accommodations. These costs are determined on a case-by-case basis, depending upon the needs of the employees and the conditions of the work environment. For private enterprises, the Internal Revenue Code allowed a deduction of up to $15,000 per year for expenses associated with removal of qualified architectural and transportation barriers. A 1990 821

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amendment also permitted eligible small businesses to receive a tax credit for certain costs of compliance with the ADA. An eligible small business was defined as having gross receipts of less than $1 million or with a work force of no more than thirty full-time employees. Qualifying businesses could claim a credit of up to 50 percent of eligible access expenditures that exceed $250 but do not exceed $10,250. Given the newness and significance of the ADA, questions remained unanswered. Employers must be cognizant of the current requirements and carefully monitor legal developments applied through the courts. Given the significant regulations related to the ADA issued by the Equal Employment Opportunity Commission and the Department of Justice, employers should ensure that they create and validate job descriptions, train managers and supervisors how to act appropriately with respect to individuals who have any disability, determine essential and nonessential functions of any job, and be able to defend any employment decision regarding disabled applicants. Bibliography Barlow, Wayne E. “Accommodate the Disabled.” Personnel Journal 70 (November, 1991): 119-124. Barlow summarizes the key EEOC regulations related to the ADA. He carefully explains the differences between essential and nonessential job functions as well as three categories of reasonable accommodation to enable an individual who has a disability to perform a job. Barlow, Wayne E., and Edward Z. Hane. “A Practical Guide to the Americans with Disabilities Act.” Personnel Journal 71 (June, 1992): 53-60. The authors provide an excellent guide for employers to ensure compliance with the provisions of the ADA in addition to recommendations to limit the associated costs to employers for potential claims of discrimination. Hunsicker, J. Freedley, Jr., “Ready or Not: The ADA.” Personnel Journal 69 (August, 1990): 81-86. Hunsicker describes the key legislative provisions of the ADA and what impact such regulation will have on governmental and corporate human resource policies and procedures. Koen, Clifford M., Jr., Sandra J. Hartman, and Stephen M. Crow. “Health Insurance: The ADA’s Missing Link.” Personnel Journal 70 (November, 1991): 82-87. The article discusses the issue of health insurance and its significant omission from the ADA. Specifically, the authors discuss the options available to employers and disabled workers. Lord, Mary. “Away with Barriers.” U.S. News and World Report 113 (July 20, 1992): 60-63. Lord discusses compliance with the provisions of the 822

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ADA and the economic impact some of the changes may have on employers and their places of business. She provides some commonsense examples as to what can be done at low cost as well as some examples of corporate innovations and imagination. McKee, Bradford. “A Troubling Bill for Business.” Nation’s Business 78 (May, 1990): 58-59. Bradford discusses some of the concerns that owners of small businesses have voiced regarding the sweeping requirements of the ADA. Issues of possible litigation and questions of cost compliance are also discussed. Mudrick, Nancy. “An Underdeveloped Role for Occupational Social Work: Facilitating the Employment of People with Disabilities.” Social Work 36 (November, 1991): 490-495. Mudrick presents an extensive analysis of the issues confronting workers with disabilities and their employers. Provides information about disabilities and workplace disability policy important to the practice of occupational social work. U.S. Equal Employment Opportunity Commission and the U.S. Department of Justice. Americans with Disabilities Act Handbook. Washington, D.C.: U.S. Government Printing Office, 1991. Excellent handbook containing regulations and interpretations of all three titles of the ADA. John L. Farbo Cross-References Congress Passes the Equal Pay Act (1963); The Civil Rights Act Prohibits Discrimination in Employment (1964); The Pregnancy Discrimination Act Extends Employment Rights (1978); The Supreme Court Rules on Affirmative Action Programs (1979); The Supreme Court Upholds Quotas as a Remedy for Discrimination (1986).

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BUSH SIGNS THE CLEAN AIR ACT OF 1990 Bush Signs the Clean Air Act of 1990

Categories of event: Consumer affairs and transportation Time: November 15, 1990 Locale: Washington, D.C. The Clean Air Act of 1990 established new standards for tailpipe emissions, mandated special devices to reduce fumes in selected areas, and required automakers to produce cars by 1995 that run on alternative fuels Principal personages: George Bush (1924), the forty-first president of the United States William Reilly (1940), the administrator of the Environmental Protection Agency John D. Dingell (1926), the chairman of the House Energy Committee Henry A. Waxman (1939), the leading pollution fighter in the House Robert C. Byrd (1918), a Democratic U.S. senator George Mitchell (1933), the Senate Majority Leader Richard Ayres (?-1992), the chairman of the National Clean Air Coalition, an environmentalist group John H. Chafee (1922-1999), a Republican U.S. senator Max Baucus (1941), the Democratic floor manager of the clean air debate Summary of Event The Clean Air Act of 1990 (S. 1630) passed after nearly two years of deliberations in Congress and marked a significant departure by President George Herbert Walker Bush from the policies of his predecessor, Ronald 824

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Reagan, who had resisted legislative initiatives in the area. The law amended the Clear Air Act of 1970 and yielded comprehensive air pollution legislation. It addressed air-quality standards to combat smog in polluted cities, proposed tougher standards and alternative fuels to mitigate ozonerelated problems stemming from automobile tailpipe emissions, enunciated tough rules for toxic emissions from industrial plants, and mandated controls on emissions of sulfur dioxide and nitrogen oxides that contribute to acid rain. Enacted in 1970, the Clean Air Act (CAA) was first amended in 1977. Although the CAA authorized the Environmental Protection Agency (EPA) to impose sanctions in order to attain federal air-quality standards related to ozone and carbon monoxide, they were rarely used. The blame for ineffective administrative enforcement has been traced by some analysts to frequent and inappropriate intervention from the courts. The EPA’s distaste for judicial intervention may have created policies more preoccupied with surviving eventual judicial scrutiny than with effectively tackling air pollution. Regardless of whether ineffective enforcement stemmed from the administrative process in the EPA or from the judicial system, prolonged laxity on federal standards had seriously undermined air quality in several urban areas. Deteriorating air quality posed a rapidly growing public health hazard. Despite the clear need to revise and strengthen the CAA to empower strict enforcement of tough air-quality standards, there was significant resistance within Congress to such action. Several members of Congress feared that stronger legislative initiatives on clean air would impose unreasonable social burdens, such as significant numbers of lost jobs and dramatically increased costs to industries and eventually to consumers. These fears found eloquent expression through John D. Dingell, who used his stewardship of the House Energy Committee to thwart any attempt to impose tough clean-air standards on his constituents, which included the automakers in Detroit. Similarly, Senator Robert C. Byrd of West Virginia vigorously opposed clean-air proposals aimed at industrial emissions of sulfur dioxide as a means of attacking the acid rain problem because such proposals, if enacted, would adversely affect demand for the high-sulfur coal mined in his home state. Congressional members from the Midwest were apprehensive that acid rain proposals would impose unreasonable additional costs on utilities in their states that traditionally burned high-sulfur coal, as a result of measures such as mandatory installation of scrubber devices. These considerations often engendered intransigence and heated exchanges in congressional debates and eventually led to closed-door nego825

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tiations in which the set of 1990 CAA amendments was finalized. Senator George Mitchell and Representative Henry A. Waxman played vital roles in pushing the legislation though Congress. Senators John H. Chafee and Max Baucus and EPA administrator William Reilly also provided instrumental support for passage of the bill. Various interest groups including the National Clean Air Coalition, an environmentalists’ group led by Richard Ayres, and the Clean Air Working Group, a business-sponsored lobby, critically analyzed the proceedings from their idiosyncratic perspectives. The final version of the amendments as signed into law on November 15, 1990, had far-reaching implications for businesses and consumers. It included elements pertaining to ambient air quality (smog), motor vehicles, air toxins, acid rain, stratospheric ozone, and enforcement. The smog provisions required monitoring the attainment of National Ambient Air Quality Standards (NAAQS) in all areas. Five classes of air pollution problems were defined to assess the extent of such attainment: marginal, moderate, serious, severe, and extreme. Depending on the degree of severity of air pollution as reflected in this classification, different deadlines were imposed for each area to attain the NAAQS levels. Moreover, the amendments lowered the definition of a major smog source to any industrial unit that produced fifty tons of volatile organic compounds (VOCs) per year in areas classified under the “serious” ozone category, twenty-five tons for “severe” areas, and ten tons for “extreme” ozone areas. Many regions had not attained the NAAQS levels by 1992. The law requires states to develop implementation plans to reach these standards. In cases of failure of areas to attain standards, the EPA is required to bump up each such area into the next higher category; the law also empowers states to voluntarily bump up any area. Taken together, these key provisions empower state regulatory bodies and even enforcement agencies at the local level to monitor and control all pollution sources, ranging from huge utilities and oil refineries to the relatively small sources, such as local dry cleaners and paint contractors, that previously attracted little regulatory attention. With regard to motor vehicles, the amendments delineated tailpipe emissions standards for harmful pollutants such as hydrocarbons (mandated to be cut by 35 percent by 1994) and nitrogen oxide (mandated to be cut by 60 percent by 1994). The longevity of emission control equipment in automobiles was also a subject of concern. The act stipulated that by the year 1998, such equipment should last for ten years or 100,000 miles. The law also empowered the EPA administrator to phase in by 1995 the use of reformulated gasoline, gasoline with chemical composition changed to achieve more favorable emission characteristics, in the nine most polluted 826

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cities in the nation. In addition, the law mandated a pilot program to sell 150,000 “clean fuel” automobiles (those using alternative fuels) by 1996 in California. The law specified a list of 189 hazardous air pollutants and established procedures for evolving, reviewing, and enforcing standards designed to restrict these pollutants. From an operational standpoint, sources of such pollutants were required to achieve the maximum achievable control technology (MACT) standards. In other works the source should derive the maximum benefit from all available technological approaches in order to meet the standards prescribed. Provisions also identified sulfur dioxide and nitrogen oxide generated by the combustion of fossil fuels such as coal as the primary sources of acid rain. Specific deadlines for reducing such emissions were prescribed. With regard to stratospheric ozone, the law promulgated steps to monitor, report, and control chlorofluorocarbons (CFCs). The EPA administrator was required to set standards for recycling and disposal of CFCs and to develop regulations concerning the servicing of refrigerant and air conditioning appliances. A timetable for phasing out the production of CFCs also was prescribed. Finally, the law devised a tough enforcement framework composed of judicial procedures and civil and criminal penalties. Impact of Event Because the CCA amendments of 1990 are broad and far-reaching in scope, their impact is likely to be felt in several facets of business activities. The following discussion critically assesses the likely costs and benefits of the amendments. Available estimates suggest that the annual cost of achieving the CAA goals will amount to $25 billion by 2005, by which time all the time-bound programs are expected to be phased in. From a business perspective, however, this law’s most important cost impact centers on economic implications for firms and industries that fail to meet the prescribed clean-air standards. If the law is enforced strictly, such entities may have to install costly devices to reduce harmful emissions to levels acceptable under the law or stop production entirely. Firms in the U.S. steel industry exemplify this dilemma. Rigid enforcement of the prescribed emission standards would force them to stop using coal for producing coke, a necessary input for manufacturing steel. Because there is no short-term solution that would allow production of coke without violating the new emission standards, these firms eventually will have to choose between importing coke from elsewhere or going out of business. Either option portends loss of jobs. Although the law has modest provisions for job-loss benefits, including 827

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needs-related payments and allowances for job search and relocation, it is unlikely to eliminate the hardships of unemployment caused indirectly by the law. The law does provide for an elaborate market system of emission credits or “allowances” that firms are eligible to receive if they meet certain requirements in complying with emission standards. In the case of sulfur dioxide emissions, these allowances can be “traded” between firms. The law mandates that utility firms decrease sulfur dioxide emissions to onehalf of the emission levels produced ten years ago. A firm that successfully reduces emissions more than is required will be given “credits” that either can be held as a “buffer” to accommodate increased emissions from future production expansion or can be sold to other firms that were unsuccessful in meeting emission standards. This provision could become an incentive to motivate industries to overperform in the clean-air context, to exceed minimum standards for compliance stipulated in the law. This incentive approach, taken together with the provisions for civil and criminal penalties in case of noncompliance with federal air-quality standards, lends balance and strength to the enforcement process by integrating both positive rewards and negative punishments into the regulatory system. This duality could enhance compliance with CAA provisions. Compliance levels of the 1980’s left much to be desired. The Clear Air Act of 1990 was designed to achieve the following key benefits: reduced levels of acid rain (through reduction in annual emissions of ten million tons of sulfur dioxide and two million tons of nitrogen oxide) and consequent protection of lakes, streams, national monuments, and public health; new health standards that were to be met by most cities by the year 2000; phasing out of CFCs and other harmful products that damage the protective ozone layer; and a reduction of 2.7 billion pounds in the amount of toxins put into the air each year. Other benefits include the encouragement of industries that produce alternative fuels that are less damaging to the environment. The law mandates a phased introduction of reformulated gasoline but is essentially silent on several other substitutes for conventional gasoline that decrease the level of ozone-forming hydrocarbons. These include methanol, ethanol, compressed natural gas, propane, butane, hydrogen, and electricity. Although reformulated gasoline is relatively less effective in reducing harmful tailpipe emissions than are other alternative fuel options, it nevertheless commands a big advantage: unlike other alternative fuels, it can be distributed through the same system used for conventional gasoline. Stated differently, other alternative fuels could entail additional costs for refitting automobiles currently refueled by conventional gasoline as well as for building or refitting distribution centers for fuel. 828

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A less tangible benefit of CAA is the law’s framework for building a meaningful dialogue among government, industry, and environmental groups. Various interested parties including the American Petroleum Institute, the Motor Vehicles Manufacturers Association, the Natural Resources Defense Council, the Sierra Club, and the methanol and ethanol industries reached an agreement on reformulated gasoline and oxygenated fuels (gasoline with oxygen added to diminish the severity of automobile emissions) through a unique regulatory negotiation process. The purpose of this joint exercise was to help the EPA refine the details of rules that promote cleaner air while providing industry with a greater degree of flexibility. Rules developed through negotiation will save an estimated six billion gallons of gasoline per year. Other evidence indicates a healthy convergence of viewpoints among businesses and consumers. Several consumer surveys suggest that Americans consider environmental protection to be an important issue. Examples abound of practices in American firms aimed at decreasing all forms of environmental pollution. The Clean Air Act of 1990 formalizes this general business sensitivity and focuses attention on one aspect of the environment, clean air. Bibliography Bryner, Gary C. Blue Skies, Green Politics: The Clean Air Act of 1990 and Its Implementation. Washington, D.C.: Congressional Quarterly Press, 1995. “The Clean Air Act Amendments of 1990.” Journal of Property Management 56 (January/February, 1991): 6. Assesses implications of the law for property values in specifically targeted cities. “Clean Air Act Rewritten, Tightened.” In Congressional Quarterly Almanac 1990, edited by Neil Skene. Washington, D.C.: Congressional Quarterly, 1991. Provides a comprehensive overview of the Clean Air Act of 1990, including earlier legislation and how the 1990 law evolved. Discusses provisions of the law in depth. Melnick, R. Shep. Regulation and the Courts: The Case of the Clean Air Act. Washington, D.C.: Brookings Institution, 1983. A well-researched study of the impact of the judicial process on the effectiveness of enforcing provisions of the early versions of the Clean Air Act. Reviews several cases and evidence suggesting how the judicial process may have adversely affected the administration of the Clean Air Act. Rosenberg, William G. “The New Clean Air Act of 1990: Winds of Environmental Change.” Business Horizons 35 (March/April, 1992): 34-36. An informative, albeit favorably biased, account of the Clean Air Act of 829

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1990, its implications, and its consequences. Rosenberg was an official of the Environmental Protection Agency at the time the article was written. Provides several examples of corporate efforts to help the environment. Zimmerman, Fred. “A Small Business Environmental Primer.” The National Public Accountant 37 (June, 1992): 18-24. Discusses specific elements of the Clean Air Act of 1990. Reviews implications of selected aspects of the Clean Water Act of 1987, the Oil Pollution Act of 1990, the Resource Conservation and Recovery Act of 1976 as amended by the Solid Waste Disposal Act of 1984, and the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 as amended by the Superfund Amendments Reauthorization Act of 1986. Useful source for businesses for basic information on environmental regulations. Siva Balasubramanian Cross-References Congress Passes the Motor Vehicle Air Pollution Control Act (1965); The Environmental Protection Agency Is Created (1970); The United States Plans to Cut Dependence on Foreign Oil (1974); The Alaskan Oil Pipeline Opens (1977).

830

THE NORTH AMERICAN FREE TRADE AGREEMENT GOES INTO EFFECT The North American Free Trade Agreement Goes into Effect

Category of event: International business and commerce Time: January 1, 1994 Locale: Washington, D.C. The North American Free Trade Agreement promised to eliminate tariffs and other trade barriers among the United States, Canada, and Mexico, creating the world’s largest and richest trading bloc Principal personages: George Bush (1924), the president of the United States, 19891993 Bill Clinton (1946), the president of the United States, 1993Carlos Salinas de Gortari (1948), the president of Mexico Jean Chrétien (1934), the prime minister of Canada Summary of Event The North American Free Trade Agreement (NAFTA), initialed by President George Bush in 1992 and signed by President Bill Clinton in 1993, brought Mexico into a free trade area with the United States and Canada. As of 1993, Mexican tariffs against American products averaged about 13 percent but were complemented by a host of nontariff restrictions on everything from blue jeans to frozen orange juice concentrate. NAFTA would eliminate these tariffs and restrictions over the next fifteen years. Not all barriers were to fall on January 1, 1994, the effective date of the free trade agreement. Some of the most sensitive—for example, Mexico’s restrictions on imported auto parts—would allow breathing spells for industries expected to be devastated by foreign competition. According to the 831

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Clinton Administration, however, half of all American exports would have open access to Mexico at the beginning of 1994. Tariffs on all farm products would be phased out, but producers would be given fifteen years to adjust to a duty-free status on sensitive products. These included corn and dry beans for Mexico and orange juice concentrate, melons, sugar, and asparagus for U.S. farmers. Mexican import licenses, which covered about one-fourth of U.S. exports, would be dropped immediately. In the areas of trucking and automobile manufacturing, qualification for duty-free treatment would require the North American content of cars to be at least half, rising to 62.5 percent in eight years. Mexico would also allow foreigners to invest in its trucking firms. Mexican, Canadian, and American trucking companies would be allowed to do business on cross-border routes. That commerce previously was prohibited. Mexico would allow U.S. and Canadian banks, brokerage firms, and insurance companies free access after a six-year transition period during which bans on foreign ownership would be phased out. U.S. companies would be allowed to compete for contracts from Mexico’s public telephone system, and investment restrictions would be eliminated by July, 1995. For clothing made from yarns and fabrics from North America, Mexico would be able to escape high duties on textile shipments to the United States and Canada. In addition, NAFTA established a trinational commission to oversee environmental and labor laws. Sanctions—punitive trade tariffs in the case of the United States and Mexico, fines in the case of Canada—would be levied for failure of a country to enforce its own laws. Passage of NAFTA required political maneuvering in attempts to placate various constituencies. Investors nervously shuffled in preparation to jump out of markets—parPresident Bill Clinton signed the NAFTA agree- ticularly in Mexico—should ment that had been initialed by his predecessor, NAFTA fail. Most U.S. executives doing business with George Bush. (Library of Congress) 832

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Mexico or Canada planned to stick with their optimistic investing and exporting strategies even if Congress rejected the trade pact. The rapidly modernizing Mexican economy was a big importer of machines and commodities, which the United States excelled in producing. Because Mexico already was relatively open to these goods, the agreement itself was expected to have a modest impact on American sales. Locking into place President Carlos Salinas de Gortari’s commitment to free markets, however, would boost American industries ranging from aircraft to grain to telephone equipment. By keeping Mexico’s growth on track, NAFTA would serve many other American industries satisfying the Mexican consumer’s thirst for material goods. The pact was striking for its marriage of economies with vastly different levels of wages and productivity. Jobs and profits would undoubtedly be lost in labor-intensive, low-wage American industries including apparel, shoes, and household glassware. Proponents of NAFTA argued that relatively few U.S. jobs would go south because the Mexican economy was tiny compared to that of the United States. Even the most optimistic scenarios for Mexican growth showed it remaining a minor player in most American markets for decades. In any case, Mexican industry already had relatively easy access to American consumers, as did producers in low-wage countries from Thailand to Turkey. So, for that matter, did illegal Mexican immigrants, who arguably constituted greater competition for low-wage American jobs than did legal Mexican imports. NAFTA proponents predicted that job growth in American high-wage industries would initially exceed job losses in the low-wage industries because exports to Mexico would grow rapidly. If the past is a good indication, the net impact on U.S. jobs would be small, since redundant workers would be redeployed quickly to more competitive American industries. Environmentalists worried that Mexican industrial pollution would poison the American side of the border as well as fouling Mexico’s air and water. American unions jumped on the regulatory bandwagon, pointing to Mexico’s malign neglect of working conditions. It was not clear, however, why the accord would undermine the environment or labor standards. Trade and investment liberalization would probably reduce cross-border pollution, as it would end the artificial concentration of industries in the freetrade border zones. The Clinton Administration worked to defuse the issues by writing a side agreement providing for a watchdog group to monitor compliance. Another challenge came from economists troubled by the rise of regional trade blocs. They feared that an open border with Mexico would divert cost-reducing trade with Asia and Eastern Europe. They also won833

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dered whether the North American economic alliance would spur Japan to form a competing bloc on the other side of the Pacific. Objections to NAFTA appeared to be strongest in the United States. The legislatures of Canada and Mexico approved the agreement before it passed the U.S. Congress. President Bill Clinton signed the agreement on December 8, 1993, less than a month before it took effect. Impact of Event NAFTA was one of the most emotionally charged economic issues in the United States during the early 1990’s. The agreement provoked enthusiasm from many business leaders and academic free traders but passionate opposition from many workers and businesspeople fearing competition. Organized labor and its allies in Congress opposed NAFTA, as did a coalition of interest groups with preoccupations ranging from the environment to child abuse. To its opponents, NAFTA represented everything wrong with the U.S. economy. With unemployment concerns at the top of the nation’s agenda, the idea of free trade seemed shocking. How could free trade with low-wage Mexico mean anything but a massive loss of jobs? Competition from Canada prompted almost no debate. A rational examination of facts calmed some of the hysteria concerning potential job loss. The $5 trillion gross domestic product (GDP) of the United States dwarfed Mexico’s $300 billion GDP. The Mexico economy simply did not have the capacity to absorb U.S. jobs; if job transfer occurred, it would be gradual. NAFTA merely applied the final touches to opening trade between the United States and Mexico. Trade was already basically open; NAFTA liberalized trade in the least competitive areas. It also allowed for a transition period to soften the blow. NAFTA foes emphasized the experience of the maquila industry, which had a special customs regime. In this rapidly growing sector, U.S. companies had labor-intensive assembly work performed by low-wage Mexican workers. What happened was what NAFTA opponents claimed would become a pattern. NAFTA proponents suggested that if assembly work were not done in Mexico, it was plausible that U.S. jobs would disappear because entire production processes would move offshore. Opponents of NAFTA believed there would be dramatic U.S. job losses and lowered wages as Mexico benefited from exports to the United States, plant relocations, and massive investment across the border by U.S. companies. Experience following the opening of the Mexican economy and a semblance of prosperity there suggests a different picture. From 1985 to 1993, the U.S. trade balance with Mexico improved by approximately $10 834

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billion, turning from deficit to a surplus of about $5 billion. The improved balance of trade implied a net gain of about 350,000 U.S. jobs. Under NAFTA, Mexican demand for U.S. goods was likely to expand at a healthy rate as Mexicans increasingly took advantage of access to U.S. goods. Some American environmentalists worried that the weaker environmental and labor market regulations in Mexico would give an unfair advantage to producers there. The United States had legitimate concerns about pollution spilling over the border. NAFTA therefore contained numerous environmental provisions. A glaring example of transnational effects is the extensive pollution from maquiladora factories in Mexico that were permitted to export freely to the United States. One advantage of NAFTA is that it would lessen border pollution because some maquiladora plants would move to Mexico’s interior, since they would no longer have to be located along the border. NAFTA proponents argued its benefits to U.S. labor and business as well as its foreign policy aspects. Prosperity in Mexico would help ensure that modernization and increased political access would take place. Moreover, a prosperous Mexico would help stem migration and spread some growth to Central America. Opposition to NAFTA led to fears abroad about a protectionist drift in U.S. policy, prompting speculation on how the United States would behave in negotiations on the General Agreement on Tariffs and Trade. Japan also questioned the U.S. position on a variety of marketopening measures under discussion. In domestic terms, NAFTA was a test of U.S. confidence. It measured whether Americans believed in their ability to compete in open markets and in the face of a changing global economy. In foreign policy terms, NAFTA presented the opportunity to test America’s willingness to cooperate across a diverse range of issues with Mexico. Given the clear choice, the American people chose to compete in an international economy, not cower in fear of it. Undoubtedly, NAFTA would harm certain sectors of the U.S. economy. The challenge for all three signatory countries was to exploit the opportunities offered by free trade while minimizing the harms resulting from adjustment. Bibliography Bentsen, Lloyd. “NAFTA: A Vehicle for Economic Growth.” U.S. Department of State Dispatch 4 (May 10, 1993): 335-336. Deals with the position of the secretary of the treasury on NAFTA. Contains a variety of statistics intended to dispel opposition. Issues covered include growth, trade impact, and jobs. Carey, Patricia. “NAFTA or Not, Here We Come.” International Business, October, 1993, 46-52. An article dealing with debate on NAFTA. Con835

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cludes that U.S. international business leaders have no plans to alter their aggressive investing and exporting strategies for Mexico and Canada. They are convinced that economic integration of North America is inevitable. _____. “Trade War.” International Business, November, 1993, 62-68. Focuses on debates by Ross Perot and Bill Clinton concerning NAFTA. Concludes that free trade and the U.S. economy’s future are the primary issues. Suggests that Perot diverted attention from the real issues. Cremeans, John E., ed. Handbook of North American Industry: NAFTA and the Economies of Its Member Nations. Lanham, Md.: Bernan Press, 1998. Hage, David. “Free Trade: Fear, Frenzy, and Facts.” U.S. News and World Report 115 (September 13, 1993): 65-66. Draws an interesting parallel between the European free trade zone and the NAFTA agreement. Harbrecht, Douglas. “NAFTA: Let’s Make a Deal.” Business Week, November 8, 1993, 32-34. Describes the chain of events that led to the NAFTA debate. Also discusses the compromises between Congress and the president necessary to pass NAFTA. Mayer, Frederick. Interpreting NAFTA: The Science and Art of Political Analysis. New York: Columbia University Press, 1998. Nano, John B. “Neighbors, Yes—But Partners?” Financial Executive 9 (March 1, 1993): 16. Six financial executives share their hopes for and worries about NAFTA. Provides unique perspectives on controversial issues. Salinas, Carlos. “NAFTA Is a Building Block, Not a Trade Bloc.” New Perspectives Quarterly 10 (Spring, 1993): 14-18. An interview with Salinas concerning the impact of NAFTA on the U.S. and Mexican economies. Salinas states that the whole point of NAFTA for Mexico is to be able to export goods and not people. That means creating jobs in Mexico. Salinas addresses major points of opposition from Mexican perspectives. Smith, Geri. “Gearing Up for a ‘No.’” Business Week, November 1, 1993, 50-51. Outlines the plans of Mexico’s President Salinas if NAFTA fails. Stresses the importance of the trade agreement to Mexican economic and political growth and stability. Patricia C. Matthews Cross-References The General Agreement on Tariffs and Trade Is Signed (1947); American and Mexican Companies form Maquiladoras (1965); The United States Suffers Its First Trade Deficit Since 1888 (1971); Mexico Renegotiates Debt to U.S. Banks (1989). 836

CABLE TELEVISION RISES TO CHALLENGE NETWORK TELEVISION Cable Television Rises to Challenge Network Television

Category of event: New products Time: The mid-1990’s Locale: The United States During the 1990’s the cable television industry dramatically increased its market share of television viewers and brought about a revolution in program options Principal personages: Jeffrey L. Bewkes, president, chairman, and chief executive officer of Home Box Office (HBO) George Bodenheimer, president of Entertainment and Sports Programming Network (ESPN) David Chase, creator of HBO’s critically acclaimed series The Sopranos Joseph Collins, chairman of Time Warner Cable Robert Edward “Ted” Turner III (1938), founder of the Turner Broadcasting System Summary of Event While cable television was first offered during the late 1940’s in order to provide television signals to people who lived in remote areas where regular television broadcasts were difficult or impossible, the growth of the cable industry during the 1990’s went far beyond anything that could have been imagined. By 1999 almost 75 million American households subscribed to cable television. With more than 99 million American households owning television sets, the percentage of households that had decided to pay for 837

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cable service had reached 75. The cable television industry had first shown signs of growth during the 1950’s and 1960’s. At that time, cable service was offered to many small cities and towns across the country. Subscribers paid for the signals of television network affiliates, educational television, and possibly a number of independent stations. Compared to what became available to cable subscribers during the 1990’s, these early offerings were modest. By the early 1960’s, there were only 850,000 cable subscribers in the United States. During this period, local television stations began to think of cable television as a competitor that was to be feared. The Federal Communications Commission (FCC) stepped in and placed restrictions on the cable industry. It was not until the early 1970’s when any federal deregulation took place that made it easier for the cable industry to grow. The first pay-television network, Home Box Office (HBO), was started by Charles Dolan and Gerald Levin of Sterling Manhattan Cable in 1972. Out of this venture, a national satellite distribution system was created. This new satellite system paved the way for an increase in cable program networks. Ted Turner, the owner of a local Atlanta, Georgia, television station, also changed his station over to satellite distribution and in so doing created the first “superstation.” By the year 2000, Turner’s WTBS “superstation” was available to almost every cable subscriber throughout the country. In 1980, the number of cable subscribers had grown to 15 million households. With the passage of the federal Cable Act of 1984, the cable television industry became almost entirely deregulated. Because of deregulation, the cable industry boldly invested vast sums of money to wire the country and to develop new programming. More than 15 billion dollars was spent by the cable industry on wiring alone. By 1998, there were more than 10,000 cable systems, 174 national cable networks, and more than 127,000 cable employees in the United States. In 1992, the number of national cable networks was 82. In a span of six years, the number of national cable networks had increased by 100 percent. In August, 1998, the Cablevision Bureau (CAB) gathered data that confirmed that “basic cable attracted a larger monthly viewing audience than the combined broadcast networks.” This was the first time in the history of television that cable television had accomplished this. During the 1997-1998 television season, basic cable programming was watched by an average of 21.9 million households (a 38.5 share of the total audience). This constituted a 2.6 million household increase and a 4.2 share increase over the previous television season. During this same period, the broadcast networks lost 1.4 million viewing households and a 3.2 share of the audience. 838

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In 1999, cable television continued to gain viewers. During the second week of the new television season (September 27-October 3, 1999), basic cable rose 7.6 percent in average prime time ratings according to CAB’s analysis of Nielsen ratings data. For this time period, some of the basic cable programming that did extremely well included ESPN’s coverage of professional football, USA’s World Wrestling Federation (WWF) Monday Night Raw, and original films on Turner Network Television (TNT). By the late 1990’s, the average cable subscriber could choose from a wide selection of programming options. More than half of all cable subscribers could choose from among at least fifty-four channels in 1998. In 1996, the number of channels available had been forty-seven. As the cable television industry grew, the public demanded more diverse and quality programming. The first major new federal communications law since 1934 was enacted in 1996. The Telecommunications Reform Act of 1996 spurred the cable industry to expand since the new law offered regulatory relief and flexibility. While the growth experienced by the cable industry during the early 1990’s was tied more to the wiring of unserved or underserved areas, it appeared likely that growth in the twenty-first century would be tied more closely to new housing starts. American cable subscribers were able to watch a number of quality cable programs during the 1990’s. The premium cable network HBO produced the critically acclaimed and popular programs The Sopranos, Sex and the City, and Oz. In 1999, The Sopranos was nominated for sixteen Emmy Awards. The series also won a number of Golden Globe and Screen Actors Guild Awards in early 2000. Impact of Event With the growth of cable television and public clamor for ever greater variety and quality programming, it seemed almost inevitable that change and innovation would become buzzwords during the twenty-first century. In addition to cable’s ever-increasing role in television, the cable industry also hoped to be a major force in offering online services, data delivery, and high-speed access to the Internet. Through the use of fiber optics and coaxial cable, cable systems were able to offer Internet access that was hundreds of times faster than that provided over telephone lines. Cable networks were already putting Web sites on the Internet. Some of the sites include ESPN Sports Zone, Cable News Network (CNN) Interactive, and Discovery Online. One of the most promising growth areas for the cable industry was digital-package sales. Cable companies batched together special packages for customers that were hard to resist. Whether they offered digital packages, premium-channel packages, or pay-per-view 839

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packages, cable companies looked to hook new subscribers with innovative and attractive sales offers. By the year 2000, network stations in the top thirty American markets reached more than 60 percent of households with televisions through the use of a digital signal. Meanwhile, however, the industry began facing strong competition from direct broadcast satellite (DBS) technology. By the end of 1998, more than 12 million customers were getting their programming from noncable multichannel video providers. The Department of Justice stated that “while programming services are delivered via different technologies, consumers view the (DBS and cable) services as similar and to a large degree substitutable.” During the 1990’s, the top ten cable multiple systems operators (MSOs) grew extremely large. In 2000, 75 percent of the nation’s cable subscribers looked to the top ten MSOs for their programming. With more than 16 million subscribers, the largest MSO in the country was AT&T Broadband. Time Warner Cable ranked second with roughly 13 million subscribers. None of the other top ten MSOs had more than six million subscribers. It was predicted that the number of cable channels that could be offered to subscribers would reach five hundred sometime in the twenty-first century. During the 1990’s, cable services were divided into basic and premium. Basic cable service packages usually offered subscribers set numbers of channels for flat monthly rates. Subscribers wishing to add premium channels, such as HBO, Showtime, The Movie Channel, Playboy, Disney, or Cinemax, had to pay additional fees. The MSOs put together package deals on a regular basis in order to make the premium channels look more attractive to subscribers. Cable television has altered the way the American public watches television. Viewers can watch the 24-hour all-news network CNN, old films on specialty film channels, Spanish-language programming on Galavision, women’s programming on Lifetime, religious programming on the Family Channel, or music videos on Music Television (MTV) or Video Hits One (VH1). They can also shop on the Home Shopping Network or QVC and see premium sporting events on ESPN, or children’s programming on Nickelodeon. These were but a few of the viewing choices available to cable subscribers by the year 2000. It has been argued that with all the choices available to it, the public audience has become more fragmented. While in decades past the majority of viewers typically tuned in to the same popular programs, viewers of the 1990’s tended to tune in to increasingly different programs. Throughout the 1990’s, the old network television networks were unable to curtail the erosion of their market share. They had to work harder to maintain viewership. 840

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It was estimated that of the thirty-eight new shows of the 1999-2000 season offered by the networks, half would make it through the season. In previous seasons, the number of new shows that were canceled was more than half. The number of game shows and investigative-reporting programs on the networks increased during the late 1990’s. Cheaper to produce than original programming, these shows are popular with a large segment of the viewing public that still watches regular network television. It can be argued that more quality original programming is being produced on both basic cable channels and premium cable channels. While basic cable channels still have to worry about censorship issues with their programming, premium cable channels do not have such worries. Original series, such as The Sopranos or Sex and the City, can include graphic violence, nudity, and coarse language, just as theatrical films can. Moreover, cable series episodes are repeated many times, allowing subscribers to watch them at their own convenience. Critics of cable television have charged that the industry is driven principally by the high-profile programs, such as recent films, miniseries, wrestling, and premium sporting events, and that until the quantity and quality of regular cable series improves, the industry will not attract loyal viewers. However, because cable does not have the same restrictions that network television does, it can run counter to what is found on network television, taking chances that network television shuns. When the networks show reruns during summer months, cable television is free to win over new viewers with original programming. Deregulation has encouraged cable companies to venture into telephony and made it possible for telephone companies to distribute cable television programming. Cable providers also have felt emboldened to try their hand at video compression, digital transmission, and high-definition television (HDTV). Some cable operators also have experimented with two-way channel capability. This process allows subscribers to interact with the programming facilities or the system’s information headquarters. Home viewers can reply to public-opinion polls or have access to written or graphic materials. While the variety of cable television’s programming has been criticized as being nothing more than “a map of our most noble and base instincts,” the cable television industry rightly can point to how far it has come in such a relatively short period of time. American viewers have shown that they are willing to pay for the expanded choices offered to them by cable operators. Time will tell whether the public is merely paying for just another “vice,” or if the historical promise that was dreamed for television during the first decades of the twentieth century finally will come to fruition through the 841

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bold steps taken by the cable industry and the other new viewing options that will take hold in the twenty-first century. Bibliography Aufderheide, Patricia. “Cable Television and the Public Interest.” Journal of Communication 42 (Winter, 1992): 52-65. Solid overview of how the public interest can best be served by the growth of cable television. Baldwin, Thomas F., and D. Stevens McVoy. Cable Communication. 2d ed. Englewood Cliffs, N.J.: Prentice-Hall, 1988. Detailed look at every aspect of the cable industry, from the technical to public policy. Although somewhat dated, it remains essential reading for those interested in how the cable industry has evolved. Blanchard, Margaret A., ed. History of the Mass Media in the United States. Chicago: Fitzroy Dearborn, 1998. The entries “Cable Networks,” “Cable News,” and “Cable Television” are all insightful overviews. Both the “Cable Networks” and “Cable Television” entries include useful bibliographies. Brenner, Daniel L., and Monroe E. Price. Cable Television and Other Nonbroadcast Video: Law and Policy. New York: Clark Boardman, 1986. Discusses the various rulings, judicial decisions, and the Cable Communications Act of 1984 and how each has affected the cable industry. Ciciora, Walter S., James Farmer, and David Large. Modern Cable Television Technology: Video, Voice, and Data Communications. San Francisco: Morgan Kaufmann Publishers, 1999. Hodes, Daniel, Kiran Duwadi, and Andrew Wise. “Cable’s Expanding Role in Telecommunications.” Business Economics 34 (April, 1999): 46-51. Points out that as the cable industry takes on a larger role in the “telecommunications arena” it should make sure that it reduces its debt and improves its customer service in order to hold on to the subscribers that it already has. Sheffield, Rob. “The Cable Universe: Scratching the Niche.” Rolling Stone (September 17, 1998): 61-65. Survey of what cable television has to offer, from the noble to the raunchy. Stevens, Tracy, ed. International Television and Video Almanac. 45th ed. La Jolla, Calif.: Quigley, 2000. In addition to providing a detailed overview of 1998-1999 in television, it also lists the cable networks and cable systems operators. Jeffry Jensen

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Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); The Cable News Network Debuts (1980); Home Shopping Service Is Offered on Cable Television (1985); Time magazine Makes an E-commerce Pioneer Its Person of the Year (1999).

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TIME MAGAZINE MAKES AN E-COMMERCE PIONEER ITS PERSON OF THE YEAR TIME MAGAZINE Makes an E-commerce Pioneer Its Person of theYear

Category of event: Marketing Time: December 27, 1999 Locale: New York By bestowing its person-of-the-year honor on Amazon.com founder Jeffrey P. Bezos, Time magazine paid tribute to electronic commerce as a dynamic new marketplace, thereby highlighting the influence of the Internet and World Wide Web on American business Principal personage: Jeffrey Preston Bezos (1965), founder and chief executive officer of Amazon.com, an Internet retailer of books and other goods that began in 1995 Summary of Event At the age of thirty-four in 1999, Jeffrey P. Bezos became the fourthyoungest person to appear on the cover of Time magazine as its person of the year. However, it was not Bezos’s age that made his selection a surprise to most readers. Time magazine usually reserves the distinction for newsmakers and celebrities, and although known as the king of cyberbusiness, Bezos was not a national figure. However, his creation, Amazon.com, had become a household name—credited, in fact, with starting and defining the rapidly expanding field of electronic commerce (e-commerce) via the Internet and the World Wide Web. Through the honor to Bezos, therefore, Time also recognized a novel, powerful cultural force. Though only four years old, the new form of marketplace not only transformed how companies sell products and services to each other and to consumers but also affected social behavior and politics as well. 844

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Bezos founded Amazon in 1995 to sell books to consumers over the Internet. Many business commentators predicted failure. Instead, the company’s sales skyrocketed. In 1998, its book sales grew 275 percent, followed by another 82 percent the following year, and by then books accounted for only about one-half of its total sales. Amazon had expanded to offer so many other retail goods that its Web site amounted to an online mall. Investors, initially skeptical, took note. When Amazon began trading its stock publicly in 1997, shares sold for $1.50 each; at the end of 1999, a share cost $80. In part its success came from being the first company of its kind in cyberspace, but it also placed great emphasis upon customer service to ensure speed of delivery and customer satisfaction and provided browsers with handy consumer information, such as reviews, product ratings, and technical data. Other innovators soon capitalized on the Internet too, some enjoying success that was nearly as spectacular. For instance, the first business to offer online auctions to general customers—Ebay, started in late 1995— had more than four million listings in 4,320 categories by early 2000. Beginning in 1997, Handiman Online offered to match homeowners with craftsmen and contractors in their locale for construction projects. In 1998, HomeGrocer began delivering groceries, ordered from its Web site, to residences on the West Coast, and the same year Ticketmaster began selling tickets online for events nationwide. A host of other electronic retailers (e-tailers) joined Amazon, many of them startup companies that copied its sales and customer service methods. The number of small American and Canadian businesses operating via the Internet increased 40 percent between 1996 and 1998. By 2000 more than half were online. At first large corporations, such as Sears and Whirlpool, shied away from Internet business, worried that it was just a fad. By 2000, so many had joined the trend and opened Web sites that “dot-com” (“.com”) was firmly embedded in world business culture and Americans’ vocabulary. Even advertisements in other media included firms’ e-mail addresses and Web sites as a matter of course. During the 2000 Super Bowl more than a dozen “dot-com” companies bought television advertising spots. Meanwhile, other strictly Internet companies, such as Yahoo and Excite, opened virtual malls of their own in direct competition with Amazon. Goods offered on the Internet spanned nearly the entire range of the traditional “bricks-and-mortar” retail business stock: books, prescription drugs, toys, electronic equipment and computers, airline tickets, tools and instruments, clothes, and even cars. The convenience, speed, and wealth of information directly accessible online appealed to technologically sophisticated consumers—so much so that e-commerce firms stole away custom845

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ers from other venues. Bookstores claimed that they were being driven out of business by Amazon and Barnes and Noble, which also opened its own Web site. Car dealers began to worry as well when it was found that 5 percent of car purchases in the United States were being conducted over the Internet. Travel agents lost much of their reservation-making business to online self-enrollment reservations services, such as Netscape’s Travelocity, and to Web sites maintained by individual airlines, hotels, and car rental agencies. Companies also sold services online. Infoseek and AltaVista, for example, conducted information searches, while other Web sites offered professional consultations in such fields as law and insurance, arranged contacts among single men and women, or posted advertisements for job seekers. Banks administered accounts via the Internet, and investment firms sold stocks and bonds. Charles Schwab, in fact, conducted two-thirds of its business on the Web. Auction Web sites became popular almost overnight because they appealed to the American craving for bargains and antiques. Through Ebay and others, private owners could sell new and used items to the highest bidders—from books and clothes to automobiles and speedboats. Even though companies specializing in dealing directly with customers earned $14.9 million in 1999, nearly double the amount of 1998, theirs was the smallest portion of e-commerce profits. Businesses selling to other businesses earned $109 billion during the same period. In fact, business-tobusiness e-commerce grew so important that it spurred a revolution in American supply and manufacturing procedures. Online catalogs allowed large manufacturers to order parts from suppliers more quickly, and the records of online sales let companies respond to demand more efficiently, saving time and reducing errors. The reduction in overhead expenses, estimated at between 10 and 50 percent, and the reduced waste increased profits. Governments also realized the benefits of e-commerce, distributing benefits and information and allowing citizens and businesses to file taxes electronically. Fundamental problems with e-commerce emerged during its dramatic success, however. Security systems had to be installed to protect Web sites from the vandalism of hackers, and new laws were passed to punish offenders. More important, because credit cards were the usual means of payment for consumer orders, encryption systems had to be devised to ensure thieves could not intercept credit card numbers. Some companies found that their supply and shipping systems could not keep up with the rapidly accumulating orders posted on their Web sites. In order to support its expansion, Amazon itself had to borrow $1.25 billion in bonds to pay for new warehouses, a distribution system, acquisition costs, and operating 846

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expenses in 1999, which gave it a $611 million net loss; nevertheless, Bezos believed the company would soon become profitable again. Most inhibiting of all, however, was the scarcity of workers with the technical skills for e-commerce. An estimated 360,000 jobs were waiting to be filled in the United States and Canada alone in the year 2000. Impact of Event Bezos’s recognition by Time magazine symbolized e-commerce’s sudden emergence as a significant part of American life. With approximately 2.2 million Web sites available to the public, and 300 million pages of information, the Internet presented a vast commercial potential. Increasing numbers of Americans took advantage of it through the late 1990’s, and industry experts confidently expected large upswings in holiday sales in 1999. They were not disappointed. Between Thanksgiving and New Year’s Day, 26.4 million shoppers spent more than $5 billion online, a threefold increase from 1998. The successes of 1999 attracted ever more firms to e-commerce, especially after studies found that online small businesses brought in an average of nearly one-third more revenue than traditional companies. Moreover, companies often modified their corporate structure to accommodate the new type of market. Many found that they had to expand customer service departments because customers contacted retailers directly more frequently by phone or e-mail to ask questions or arrange for replacements or refunds. Companies doing substantial business online could eliminate “middleman” distributors and offered differential pricing for small items as well as for such big items as cars. Even small businesses found that they suddenly could sell products worldwide. At the same time, e-companies saw some expenses rise, especially in training to keep workers abreast of evolving Internet capabilities and in purchases of sophisticated hardware and software. Meanwhile, e-commerce became deeply involved in other sectors of the economy. For example, the increase in direct shipping of goods to customers multiplied the demand on commercial shippers, such as the U.S. Postal Service, United Parcel Service, and Federal Express. The implications of e-commerce for society, first studied in the late 1990’s, promised to be profound. Stanford University researchers found that Internet use in general tended to isolate people, even from other family members, an antisocial trend abetted by e-commerce: Most online shoppers said that they resorted to the Web to avoid crowded shopping malls and traffic. There was also concern that the ease of purchase online would tempt people to overspend, which could lead to a risky general increase in personal debt and bankruptcies. 847

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A clear relation existed in 2000 between income and online shopping. The likelihood of a household having a computer that was connected to the Internet rose with its income level. Because the level of education also rose with income, the wealthy and well educated were the people who used the Internet most often. The Internet threatened to intensify divisions between rich and poor and create a class-dominated marketplace through e-commerce. Accordingly, social observers called for more public-financed Internet facilities at such places a libraries and schools. Public schools were urged to increase instruction devoted to computers and information technology. Similar concern arose over issues of nationalism. The Internet could internationalize commerce in a way difficult to control by local governments, opening traditionally closed markets to global products and affecting both a nation’s economy and autonomy. Countries with extensive technological infrastructure and research and development would certainly dominate developing countries online, increasing global economic stratification. Moreover, global connectiveness via the Internet created an autonomous behavioral milieu, which could erode cultural differences— a possibility as disturbing to nationalists as it was pleasing to e-commerce companies. Proponents and critics alike predicted that e-commerce could to some degree reconstruct society in the twenty-first century. Accordingly, politicians anticipated that local and federal government policies would require reshaping as well, but exactly how remained controversial as the century began. Taxation was such a divisive issue that Congress imposed a threeyear moratorium on new federal, state, and local taxes on e-commerce in 1998. In fact, business leaders resisted regulation of any sort, fearing it would cripple e-commerce, and wanted governmental support only in developing new technology. Starting in 2000, the U.S. Census Bureau began collecting data on e-commerce to help the nation settle such policy issues. Bibliography Burnham, Bill. How to Invest in E-commerce Stocks. New York: McGrawHill, 1999. Concise introduction to e-commerce precedes a practical guide to the advantages and dangers of investing via the Internet. Fellenstein, Craig, and Ron Wood. Exploring E-commerce, Global E-business, and E-society. Englewood Cliffs, N.J.: Prentice-Hall, 2000. Explains e-commerce for business owners and considers its future influence on government, medicine, and education. Ramo, Joshua Cooper. “Why the Founder of Amazon.com Is Our Choice for 1999.” Time 154 (December 27, 1999): 50-51. The article announc848

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ing the choice of Bezos as person of the year, with accompanying articles about e-retailing and prominent cybermerchants. Schiller, Dan. Digital Capitalism: Networking the Global Marketing System. Cambridge, Mass.: MIT Press, 1999. Analyzes market-driven policies, economic potentiality, and influence on educational and social policy of cyberspace, warning powerful corporations could misuse it. Tiernan, Bernadette. E-Tailing. Chicago: Dearborn, 2000. Guide to the basics of e-commerce structure and procedures, Internet psychology, on-line merchants, and likely products and technology of the future. Roger Smith Cross-References The A. C. Nielsen Company Pioneers in Marketing and Media Research (1923); Jobs and Wozniak Found Apple Computer (1976); IBM Introduces Its Personal Computer (1981); Home Shopping Service Is Offered on Cable Television (1985); Dow Jones Adds Microsoft and Intel (1999).

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DOW JONES ADDS MICROSOFT AND INTEL Dow Jones Adds Microsoftand Intel

Category of event: Finance Time: November 1, 1999 Locale: New York, New York Dow Jones and Company added two technology stocks, Microsoft and Intel, to its Dow Jones Industrial Index Principal personages: Charles Henry Dow (1851-1902), financial analyst and reporter Paul E. Steiger, managing editor of The Wall Street Journal Summary of Event The Dow Jones Industrial Average (DJIA) was created by Charles H. Dow, cofounder of Dow Jones and Company. A financial analyst, Dow believed that a summary measure of the prices on the New York Stock Exchange (NYSE) would be useful to members of the financial community and help them follow business trends. He developed a composite list of major stocks and an index of their prices, the DJIA. When the DJIA was first published on May 26, 1896, it consisted of the stocks of twelve companies. These stocks included Distilling and Cattle Feeding, American Sugar, and American Cotton Oil—major companies now forgotten by most modern investors—and General Electric, the only original stock that remained on the list in the year 2000. On October 1, 1928, the average was expanded to encompass thirty stocks and closed at 240.01, marking the first day that the average was comparable to the thirty-stock DJIA of the present. The stocks in the DJIA are selected by the editors of The Wall Street Journal, a financial and business newspaper that is the main publication of Dow Jones and Company. The editors select stocks of major companies that represent the broad market and U.S. industry and are widely held by 850

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individual and institutional investors. Often referred to as “blue-chip” industrials, DJIA stocks are rarely changed in order to maintain continuity and to ensure that past, present, and future averages are comparable. Many of the substitutions made over the years have been the result of mergers or dissolutions, but changes have also been made to alter the representation of industry within the stocks. For example, in 1924, a nonindustrial stock, that of the retailer Woolworth, was added. Since 1976, about two-thirds of the DJIA stocks have been substituted, largely to reflect the shift away from heavy industry and toward service industries that developed rapidly during the 1960’s. In the 1990’s, DJIA stocks were changed three times. The first change occurred on May 6, 1991, when Caterpillar, the Disney Company, and J. P. Morgan were added. Navistar, U.S. Steel (USX), and Primerica were dropped. Interestingly, Primerica was returned to the average six years later after it became Citigroup. On March 17, 1997, Citigroup, Hewlett-Packard, Johnson & Johnson, and Wal-Mart Stores were added. Westinghouse Electric, Texaco, Bethlehem Steel, and Woolworth were dropped. On October 26, 1999, The Wall Street Journal announced four new changes to the DJIA. The additions included two technology stocks, Microsoft, Inc., and Intel Corporation, as well as former Baby Bell SBC Communications and retailer Home Depot. These four stocks replaced retailer Sears Roebuck and the so-called “smokestack” stocks Chevron, Goodyear Tire and Rubber, and Union Carbide—all of which had been in the list since at least 1930. The additions and deletions were the result of a Dow Jones review conducted over several months, partly in response to the planned takeover of Union Carbide by the Dow Chemical Corporation. The technology stocks Microsoft and Intel are traded on the electronic Nasdaq (National Association of Securities Dealers Automated Quotations) Stock Market and are the first DJIA stocks not to be on the New York Stock Exchange. The Nasdaq Stock Market lists nearly 5,000 companies, and a far larger number of technology stocks are traded on Nasdaq than on the NYSE. As of November 1, 1999, the thirty stocks of the DJIA were Allied Signal, Aluminum Company of America, American Express Company, AT&T Corporation, Boeing Company, Caterpillar, Citigroup, Coca-Cola Company, DuPont Company, Eastman Kodak Company, Exxon Corporation, General Electric Company, General Motors Corporation, HewlettPackard Company, Home Depot, Intel Corporation, International Business Machines Corporation (IBM), International Paper Company, J. P. Morgan and Company, Johnson and Johnson, McDonald’s Corporation, Merck and Company, Microsoft Corporation, Minnesota Mining and Manufacturing 851

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Company (3M), Philip Morris Companies, Procter and Gamble Company, SBC Communications, United Technologies Corporation, Wal-Mart Stores, and Walt Disney Company. Market analysts regarded the change in the DJIA as an acknowledgment of the growing importance of technology in U.S. industry and in the stock market. The addition of Microsoft was probably also motivated by the top software maker’s market dominance and its high stock market value. The substitution of Home Depot for Sears was evidently made to reflect consumer preference for discounters over traditional department stores. Impact of Event Before its latest changes, some analysts had criticized the DJIA as being stodgy and no longer representative of the economy in the United States; they charged that the DJIA’s usefulness was reduced in comparison to the Standard & Poor’s 500-stock index. The S&P index, whose list is 25 percent technology, is a broader index. Many professional investors favor the broader S&P, although to many individual investors and much of the general public, the DJIA is virtually synonymous with the stock market. Only about $165 million is invested in mutual funds designed to copy the performance of the DJIA, but about $700 billion is invested in funds that track the S&P. Nevertheless, moves in the DJIA can have a major impact on investor psychology and can increase or decrease confidence in the stock market. The addition of Microsoft and Intel to the DJIA brought the number of technology stocks in the average to four. The editors of The Wall Street Journal added IBM in 1979, after dropping the stock in 1939, causing the index to ignore the company’s dramatic performance on the stock market during those forty years. The second technology stock on the average was Hewlett-Packard Company, added in 1997. With the 1999 additions, technology stocks reached 16 percent of the average’s weight. After November 1, 1999, nineteen out of thirty of the DJIA stocks were service industries, including technology, consumer products, and financial services. This proportion roughly reflects the share of service industries in the U.S. economy. The DJIA, which closed at 240.01 on October 1, 1928, fell to a low of 41.22 on July 8, 1932. It did not close above 1,000 until November 14, 1972, more than forty years later. On January 8, 1987, the Dow closed above 2,000 for the first time in history. In the 1990’s, however, the Dow would hit new records with increasing frequency. It climbed above 3,000 on April 17, 1991, above 4,000 on February 23, 1995, above 5,000 on November 21, 1995, and above 6,000 on October 14, 1996. In 1997, it rose 852

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After being added to the Dow Jones index, Microsoft and Intel continued to rank among the most active stocks traded on the New York Stock Exchange.

above 7, 000 on February 13 and above 8,000 on July 16. April 6, 1998, saw the Dow climb above 9,000. In 1999, the Dow surpassed 10,000 on March 29 and 11,000 on May 3. On January 14, 2000, the Dow cleared 11,700. Many analysts believed that the Dow’s rise would have been faster if more technology stocks had been included earlier, given these stocks’ high growth rates, and argued that these changes should have taken place earlier. For example, Microsoft’s price gains for a ten-year period were 7,395 percent, versus the Dow’s 275-percent rise. Intel’s price gain for the same period was 3,346 percent. Although most market analysts praised the changes in the DJIA as making the average a better representation of the state of the market, some analysts feared that the addition of inherently volatile technology stocks might make the average too volatile. Some noted that the technology stocks, particularly Microsoft and Intel, are at their peaks, making their inclusion a somewhat risky and destabilizing proposition. Paul E. Steiger, managing editor of The Wall Street Journal, defended the decision to include the two technology stocks in an interview conducted shortly before the changes took place. He argued that some increase in volatility was an acceptable consequence of making the DJIA more representative. Both technology companies, he stated, were massive companies that play an important role in the U.S. economy. 853

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Some analysts argue that although the addition of Microsoft and Intel, which both have high price-earnings ratios (as is typical of technology stocks) and low dividends, increases the overall value of the stocks, it is unlikely to result in a more volatile index. They reason that in the Dow, because of the way the average is computed, stocks with the highest prices have the greatest impact. Microsoft is not among the highest priced DJIA stocks; Intel is much closer to the top, but it falls behind stocks such as American Express and General Electric. The DJIA, calculated almost continuously by computer, totals the prices of the component stocks and divides by a regularly adjusted divisor. This divisor, published every business day in The Wall Street Journal, is recalculated to allow for stock splits, spinoffs, and changes in the component stocks, and is designed to ensure comparability of past, present, and future averages. In the first five months after the change in the DJIA stocks, the average did not show markedly increased volatility. Although it experienced some of its biggest one-day net gains and losses in terms of index points in March, 2000, these changes were minimal when measured in percentage change. For example, on March 16, 2000, the DJIA rose 499.19 points, the largest one-day gain ever, but in terms of percentage change, the average rose only 4.93 percent. Historically, the largest one-day gain occurred on October 6, 1931, a rise of 14.87 percent—which accounted for only 12.86 points. In the early months of 2000, technology stocks continued their rapid growth as investors were drawn to their ever-increasing growth rates. Investors seemed to shy away from stocks of companies such as banks and consumer product manufacturers, which were unable to produce continued, large growth rates like those of the technology companies. What this trend means for the DJIA is not clear. On any given day, the DJIA, because of its emphasis on blue-chip industrials, sometimes moves in a different direction from other indexes such as the Nasdaq Composite Index. However, historically, over long periods of time, the DJIA and other major, popular indexes tend to trend in the same direction. The phenomenal growth in technology stocks is reflected in another area, the different percentage increases in the indexes over time. Although all the major indexes experienced an increase over a ten-year period ended December 31, 1999, the Nasdaq Composite grew 794.71 percent, while the S&P 500 grew 315.75 percent and the DJIA grew 317.59 percent. Given this trend, the addition of Microsoft and Intel to the DJIA should translate to a higher percentage increase in the index. However, five months after the change, the long-term effects of the inclusion of additional technology stocks in the DJIA was still unclear. 854

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Bibliography Glassman, James K., and Kevin A. Hassett. Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. New York: Times Business, 1999. Provides an investment strategy based on the predicted rise in the Dow Jones Industrial Average to 36,000. Hamilton, William Peter. The Stock Market Barometer. 1922. Harper & Row Bros. Reprint. New York: John Wiley & Sons, 1998. Hamilton, an editor of The Wall Street Journal who worked with Charles H. Dow, the paper’s founder and publisher, wrote a series of editorials on business and finance for the paper. Most of these editorials describe the workings of the Dow theory. Presto, John, ed. Markets Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average. New York: Dow Jones, 1998. Presents a historical perspective in pictures and text of the Dow Jones average over the years in the United States. Stillman, Richard Joseph. Dow Jones Industrial Average: History and Role in an Investment Strategy. Homewood, Ill.: Dow-Jones-Irwin, 1986. Examines the history of the Dow Jones Industrial Average and describes how the average is computed as well as its use as an investment tool. Rowena Wildin Cross-References The Wall Street Journal Prints the Dow Jones Industrial Average (1897); The U.S. Stock Market Crashes on Black Tuesday (1929); Jobs and Wozniak Found Apple Computer (1976); IBM Introduces Its Personal Computer (1981); The U.S. Stock Market Crashes on 1987’s “Black Monday” (1987); Federal Court Rules That Microsoft Should Be Split into Two Companies (2000).

855

AWARDING OF AN NFL FRANCHISE TO HOUSTON RAISES THE ANTE IN PROFESSIONAL SPORTS Awarding of an NFL Franchise to Houston Raises the Ante

Category of event: Business practices Time: October 6, 1999 Locale: The United States The amounts of money needed to support professional sports franchises jumped to a new level when investors in the city of Houston paid $700 million to the National Football League (NFL) merely for the privilege of fielding a team—which still required an additional substantial investment to create Principal personages: Lee Brown, mayor of Houston, Texas Robert “Bob” McNair, billionaire who paid $700 million for the Houston franchise Paul Tagliabue (1940), commissioner of the NFL Richard Riordan (1930), mayor of Los Angeles Michael Ovitz (1946), head of a Los Angeles group working to bring a new NFL franchise to Los Angeles Ed Roski, head of a rival group seeking to bring the NFL back to Los Angeles Eli Broad (1933), a prominent member of the Roski group Al Davis (1929), owner of the NFL’s Raiders team, which left Los Angeles in 1995, who claimed to own the Los Angeles franchise rights George Steinbrenner (1930), majority owner of the New York Yankees baseball team 856

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Summary of Event In 1995, the Los Angeles area lost both of its National Football League (NFL) teams. The Raiders returned to their original home, Oakland, California, and the Rams moved to St. Louis, Missouri—for whom they would win a Super Bowl in 2000. In 1997, the Oilers moved from Houston to Nashville, Tennessee. These were merely the latest moves in a trend of professional teams moving from one city to another when the price was right. In early 1999, three groups—two from Los Angeles and one from Houston—presented their cases to the NFL’s expansion and stadium committees. The NFL then had 31 teams and wished to add another to begin playing in the 2002 season. Each of the groups was given thirty minutes for its presentation. It was estimated that the new franchise to be awarded would cost between 700 million and 1 billion dollars. In commenting on the choices faced by the committee, McNair said he thought that “the NFL wants to be back in Houston and wants to be in Los Angeles and is trying to figure out how to do that.” During his presentation to the committee, McNair showed the league’s team owners a model of the proposed new stadium that would be built for the new Houston franchise: a retractable-roof stadium that would cost roughly $310 million. The model alone cost $85,000 to be built—a third the cost of the original Rose Bowl. It took McNair and his advisers more than two years to put on the table a convincing package for the NFL. In March, 1999, the NFL owners voted to award the league’s thirty- second franchise to Los Angeles. The league seemed to regret that the second-largest American city had lost its two teams in 1995. However, the league attached some strings to finalization of the deal. Los Angeles was given six months to decide where the stadium would be and draw up plans for its construction. The league also was concerned about how a new stadium or a refurbished existing stadium would be financed and how the franchise fee would be paid. The mayor of Los Angeles, Richard Riordan, supported the idea of bringing a professional football team back to the city. With investors such as Eli Broad and Michael Ovitz willing to raise the franchise fee, it seemed that a deal could be worked out that met all the NFL stipulations by the September 15, 1999, deadline. However, while Riordan strongly supported the local business leaders who were negotiating with the NFL for a new franchise, he was still willing to work out a deal that would have brought the Raiders back to Los Angeles. For the Raiders to return, someone would have had to persuade Raider owner Al Davis that it was in his best interest to return. It is a high-wire act that the mayor was walking, since he wanted to avoid facing a backlash from city taxpayers who might end up paying most of the tab for bringing professional football back. 857

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In the end, there were too many obstacles for Los Angeles to succeed in putting together a package by September 15. A crucial issue that made it difficult for Los Angeles to succeed was its refusal to use public financing to build a new stadium. The $310 million stadium that Houston was proposing was to require raising $195 million from public financing. A number of studies showed that relying on public financing to build stadiums is usually not a good investment for cities. It is, however, an extremely good deal for NFL owners. Of the $700 million Houston had to pay to get a franchise, each existing NFL owner was to receive $22 million. The new influx of money into the league also would add value to the other teams as well. The mere fact that investors are willing to pay $700 million to own a team makes all other teams more valuable. At the October 6, 1999, NFL meeting, the owners voted 29 to 0 for the new franchise to go to Houston. Both the St. Louis Rams (whose 1995 move to St. Louis had left much ill-feeling in Los Angeles) and the Arizona Cardinals (who had moved to Phoenix from St. Louis in 1988) abstained from voting. As the owner of the new Houston franchise, Bob McNair projected that it would take between fifteen and twenty years to recoup his $700 million investment. He stated that he believed in the old expression “Long-term gain and short-term pain.” Some of this short-term pain, though, would be relieved by the $195 million that would come from the public funding used to build a new state-of-the-art stadium. Since football has been described as a “religion” in Texas, the citizens of Houston looked forward to having an NFL team once again. However, they were also a little leery of what might happen because of their experience with the recent move to Tennessee of the Oilers—who were to face the St. Louis Rams in the 2000 Super Bowl. Impact of Event While a great deal of press coverage is regularly given to the multimillion-dollar signings of professional athletes, comparatively little attention is paid to how much money flows into the pockets of the team owners. It is, however, not surprising that some of the richest persons in the world own professional sports franchises. There are more than one hundred major-league-level teams in the United States, including baseball, basketball, football, and hockey. During the late 1990’s, the revenue generated per year by these four sports alone reached more than five billion dollars. In addition to the money coming in through gate receipts, the team owners earned money from media arrangements and from the buying and selling of franchises In earlier decades, most sports franchises remained in their home cities for long periods of time. It became common during the 1990’s for “bidding 858

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wars” to break out among cities and states contesting for new teams. Hundreds of millions of dollars would be promised by a locale in order to guarantee that a franchise would be coming to the area. While winning cities might cheer their good fortune, others bemoaned the loss of their teams, as well as lost revenue and jobs. Communities losing teams were also often stuck with unpaid bonds on stadiums that had been built for their lost teams. Professional sports plays such a large emotional and cultural role in American society that it has been difficult for elected city leaders to say no to owners who demand improved stadiums, while threatening to look for new homes. Experts have pointed out that major sports leagues have long used their cartel status to obtain subsidies and make profits. Since the 1950’s, critics have argued against financing stadiums with public funds. In 1999, George Steinbrenner threatened to move his legendary New York Yankees baseball team to New Jersey if he did not get a new stadium for his team in New York City—even though the Yankees had been one of baseball’s most successful and valuable franchises. In the late 1990’s, the team had agreed to a $496 million cable television deal, and yet the owner still felt it necessary to pressure the city for a new stadium. Since major professional sports leagues have monopoly status in the United States, each league has the right to negotiate television contracts that will benefit all its teams. In 1961, the federal Sports Broadcast Act made it possible for the leagues to work as a group in the selling of their television rights without worrying about American antitrust laws. The Fox Television network alone paid more than $17 billion in 1997 to secure non-exclusive television broadcast rights to NFL games through the year 2005. With this one contract, each NFL team received approximately $75 million per season. In 1998, Forbes magazine estimated that the average major professional sports team was worth almost $200 million. In addition to McNair’s paying $700 million for the new Houston franchise in 1999, another group paid $800 million to purchase the Washington Redskins football team and stadium, and Alfred Lerner paid $530 million to buy the Cleveland Browns football team. During the 1990’s, there were many new arenas and stadiums built. About $9 billion was spent during the decade for new sports facilities. More than 80 percent of this money was raised with state and community funding. The majority of professional sports teams played in privately owned facilities in 1950. By the 1990’s, more than 75 percent of the teams were playing in publicly owned facilities. With the average net worth of professional sports teams owners hovering at around $400 million, it seemed less likely that in the future the public would automatically vote for bonds to 859

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finance new sports facilities, so long as owners had other avenues in which to put together funding for their projects. On March 26, 2000, however, Seattle’s Kingdome stadium was imploded in order to make room for a new multipurpose stadium in the same location. Bibliography Cagan, Joanna. Field of Schemes: How the Great Stadium Swindle Turns Public Money into Private Profit. Monroe, Me.: Common Courage Press, 1998. Argues that communities should be wary of owners who insist that the public pay for teams’ new stadiums. Colangelo, Jerry, with Len Sherman. How You Play the Game: Lessons for Life from the Billion-Dollar Business of Sports. New York: Amacom, 1999. Inside story on professional sports ownership from the owner of the Phoenix Suns basketball and Arizona Diamondbacks baseball teams. Eitzen, D. Stanley. “Public Teams, Private Profits.” Dollars & Sense 228 (March/April, 2000): 21-23. While fans may concern themselves with wins and loses, the owners are busy making a huge profit on both the fans and taxpayers. Fisher, Daniel, and Michael K. Ozanian. “Cowboy Capitalism.” Forbes 164 (September 20, 1999): 170-177. Examines the creative ways the new breed of NFL owners uses to make profits. Noll, Roger, and Andrew Zimbalist, eds. Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums. Washington, D.C.: Brookings Institution Press, 1997. Collection of essays that take a close look at the economic impact of new stadiums and if a sports franchise really does add revenue to its local community. Quirk, James, and Rodney D. Fort. Pay Dirt: The Business of Professional Team Sports. Rev. ed. Princeton, N.J.: Princeton University Press, 1997. Thorough and balanced guide to such matters as “The Market for Sports Franchises,” “The Reserve Clause and Anti-Trust Laws,” “Why Do Pro Athletes Make so Much Money?,” and “Competitive Balance in Sports Leagues.” Rosentraub, Mark S. Major League Losers: The Real Cost of Sports and Who’s Paying for It. New York: BasicBooks, 1997. Detailed account of how professional sports has become a massive recipient of corporate welfare. While team owners are pampered, the public pays millions in taxes to subsidize new sports facilities. Scully, Gerald W. The Market Structure of Sports. Chicago: University of Chicago Press, 1995. Detailed examination of the business of professional sports, including a close look at management practices, players’ salaries, and the monetary value of teams. Scully points out how the 860

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recent economic growth of sports has been primarily the result of the sale of television rights. Shropshire, Kenneth L. The Sports Franchise Game: Cities in Pursuit of Sports Franchises, Events, Stadiums, and Arenas. Philadelphia: University of Pennsylvania Press, 1995. In-depth analysis of how the owners go about manipulating the system in order to almost guarantee themselves huge profits. Jeffry Jensen Cross-References Station KDKA Introduces Commercial Radio Broadcasting (1920); The 1939 World’s Fair Introduces Regular U.S. Television Service (1939); Cable Television Rises to Challenge Network Television (mid-1990’s).

861

THE Y2K CRISIS FINALLY ARRIVES The Y2K Crisis Finally Arrives

Category of event: Government and business Time: January 1, 2000 Locale: Worldwide Despite predictions of disaster to businesses, governments, and public services due to expected computer malfunctions when computers confronted January 1, 2000, on their internal calendars, the worldwide transition to the year 2000 caused few problems, thanks to extensive preparations Principal personages: Robert Bemer (1921), codeveloper of COBOL who was the first to publish warnings about the date problem hidden in most computer software Peter de Jager (1955), Canadian computer consultant who was an early, influential advocate of preparing for the Y2K transition Grace Murray Hopper (1906-1992), inventor of the English-based computer language Flow-matic, which evolved into COBOL John A. Koskinen (1939), chair of the President’s Council on Year 2000 Conversion, which oversaw efforts to prepare for Y2K Daniel Patrick Moynihan (1927), chair of the U.S. Senate committee that persuaded the federal government to prepare for Y2K Summary of Event Across North America and around the world, people waited nervously as midnight, December 31, 1999, approached. Many wondered whether predictions of doom about the year 2000 computer transition, popularly called the Y2K (for “year 2000,” with k representing the Greek kilo for “thousand”) or millennium bug, would prove correct: Would power and 862

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water supplies fail, food distribution be disrupted, the economy begin to disintegrate, nuclear missiles launch accidentally, and widescale civil disturbances begin as computers and computer networks failed everywhere? No one was completely sure how to answer these questions, even though a massive effort to fix the problem occupied governments and businesses throughout the late 1990’s. A definitive answer came within days after January 1, 2000, came and went: There were no disasters. Some computer problems did occur on New Year’s Day and afterward; however, they were so few, so inconsequential, and so easily corrected that even the most optimistic experts were surprised. The story of the Y2K transition problem began with the development of commercial computing. In 1957, Rear Admiral Grace Murray Hopper invented a programming language called Flow-matic, the first to be based on English in order to make computers easier for businesses to use. Flowmatic formed the basis for COBOL, for “common business-oriented language.” The principal data storage device of the times was the eightycolumn punch card. To conserve space, COBOL used only six digits to represent any given calendar date—two each for the day, the month, and the year, as in “04/15/53” for April 15, 1953. The shortcut dating method saved as much as twenty dollars in production of a date-sensitive record, an important way of economizing as businesses grew dependent upon computers. Computer scientists, lead by Robert Bemer, one of COBOL’s developers, warned that using only two digits for each year designation would later cause problems and argued for a four-digit style. However, the desire of businesses to minimize their immediate expenses overwhelmed such objections. When International Business Machines (IBM) designed its System/360 mainframe computer (marketed in 1964), it incorporated the COBOL two-digit year format. That computer, and its dating style, became the industry standard. Bemer again published warnings about the dating problem in 1971 and 1979 but stirred little interest and no change. To most businesses and government agencies the heart of the danger—the arrival of the year 2000—seemed too far away to worry about at the time. In 1993 Peter de Jager, a Canadian computer engineer, published an article with the alarming title “Doomsday 2000" in Computerworld. In that article and subsequent lectures de Jager argued that the Y2K bug could initiate massive disruptions and plunge the economy into a recession. Computers, he pointed out, would read a date such as “01/01/00” as “January 1, 1900” or “January 1, 1980,” depending on their default settings, because there was no provision for numbers 2000 and higher in their software, and computer-processed date-sensitive information was funda863

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mental to national infrastructures. There were already signs that he was right: That same year, a U.S. missile warning system malfunctioned when its computer clocks were experimentally turned forward to January 1, 2000. During the next seven years, other glitches turned up sporadically during testing. At the same time, with gathering momentum, attempts were underway to remedy the date problem. In 1996, Senator Daniel Patrick Moynihan of New York held committee hearings on the Y2K bug and directed the Congressional Research Service to study it. Its report helped persuade President Bill Clinton to establish the President’s Council on Year 2000 Conversion, directed by John A. Koskinen, in 1998. Koskinen oversaw programs to adjust software used by government agencies. The federal government also ordered many organizations essential to the economy, such as stock brokerages, to fix the problem—that is, “become Y2K compliant”—by August 31, 1999. Despite initial skepticism about the true seriousness of Y2K, big companies soon undertook remediation efforts of their own. Most employed one or more of three basic methods. Windowing, the most common, entailed teaching computers to read 00 as 2000 and place other two-digit year dates in their appropriate century. Time shifting programmed computers to recalculate dates automatically following a formula. Encapsulation, a refinement of time shifting, added 28 to two-digit years to synchronize computers with the cycles of days of the week and of leap years. January 1, 2000, for instance, does not fall on the same day of the week as January 1, 2005, and so adjustments were necessary to accommodate such discrepancies. All three techniques required exhaustive searches and reprogramming of mainframes and personal computers that processed time-sensitive information, such as pay schedules and product expiration dates. Computer chips embedded in equipment posed a further difficulty. After their introduction in the early 1970’s, microprocessors were included in appliances, tools, automobiles, and machinery of all kinds: They eventually controlled the operations of nuclear power plants, utilities, hospital technology, weaponry, climate control systems in buildings, and even such mundane devices as home microwave ovens. With between thirty-two billion and forty billion chips in use by 2000, their potential for causing trouble was enormous, even if only a fraction of them controlled time-sensitive operations, and often the chips were difficult to extract and replace. As Y2K approached, the frenzy of preparation increased, and predictions of disaster grew more ominous. Some consumers stockpiled generators, money, food, and fuel in case utility and supply systems became disrupted on January 1, 2000. Some government agencies failed to meet their August 31 deadline for Y2K compliance. Large corporations worried 864

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that their preparations were insufficient, while about a third of small American businesses had made no preparations whatsoever. When the moment of truth came and passed on New Year’s Day 2000, no system failures occurred, and essential services were uninterrupted even in countries, such as Russia, that were both sophisticated and largely unprepared for the date turnover. There were problems, however. Some were comical, as when a 105-year-old man was directed to attend kindergarten, some newborn children were registered as born in 1900, and the Web site of the U.S. Naval Observatory, the government’s official timekeeper, proclaimed the date as “January 1, 19100.” Most problems were simply annoyances. Some records were accidentally deleted, software used to service credit cards double-charged some users, renters returning oneday overdue videos were billed for thousands of dollars in late charges, and cell phone messages were lost. Most such problems were easily corrected. Others problems were potentially more serious. For example, one Wall Street computer inflated a few stock values, and a small number of company security systems failed. Some satellites, including one U.S. spy satellite, lost contact with their controllers. Software modifications, or simple common sense, rectified the errors. The Y2K problem did not end with the New Year’s date turnover, however. One expert calculated that only about 10 percent of the problems would turn up immediately. For instance, the leap year day, February 29, 2000, caused at least 250 glitches in seventy-five countries, although none was major. Impact of Event Even though the Year 2000 turnover passed without disaster, the event itself and the preparations for it revealed how thoroughly modern society had come to rely upon a sophisticated technological infrastructure. Controlling and coordinating that technology are computers and, increasingly since about 1990, computer networks, especially the Internet. The Y2K threat to information technology (IT) elicited one of the largest, most effective joint responses among businesses and government agencies in U.S. history, as well as extensive international cooperation. Programmers successfully corrected well over 95 percent of Y2K-related problems. The nation did learn about its dependence upon computers, but it also learned that computers were not beyond its control. Because of its very success, the remediation effort had its critics, some of them bitterly vocal. In part critics wondered how so little could go wrong if the Y2K bug was really as big a threat as IT experts had insisted. Editorials and letters in business periodicals accused the large coterie of 865

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Y2K experts of exaggerating the danger in order to scare businesses into spending money unnecessarily on remediation. They denounced the media hoopla and claimed the predictions of doom had been psychologically harmful. Critics were also outraged by the price of remediation. In 1993, de Jager estimated it would require between $50 billion and $75 billion worldwide. He was far too conservative. The United States alone spent $100 billion, including $8.5 billion by the federal government alone, according to the U.S. Department of Commerce. The worldwide bill is estimated at between $500 billion and $600 billion. De Jager and his colleagues admitted that costs may have been unnecessarily high but that nevertheless the money was well spent because without remediation widescale systems malfunctions would have occurred, costing much more money and causing civil disorder. The controversy created a measure of ill-will between businesses and IT specialists. In addition to avoiding disaster, Y2K remediation had some immediate tangible benefits. The rush to stockpile food and equipment before the New Year brought record profits to some manufacturers and retailers. Computer programmers were in high demand, and consultants earned money with books, articles, lectures, and Web sites offering advice. Companies were launched specifically to solve Y2K problems for businesses; many of them afterward diversified to serve the general needs of electronic commerce. The close scrutiny of programmers benefited companies’ overhead expenses as well. They removed the clutter of computer code that had accumulated during decades of reprogramming and computer upgrades and uncovered applications that could be eliminated, streamlining business computer systems. Many companies learned how to conduct contingency planning for IT malfunctions. Others, especially small businesses, learned how to use computers effectively for the first time. Less tangible, but at least as important, were two general lessons. First, businesses and governments were forced to reevaluate their dependence upon technology, its complexity, and the danger to it from an unforeseen condition, such as the Y2K date problem. Second, they learned dramatically that forty years of development and use had built a computer infrastructure with serious inconsistencies and imperfections. Accordingly, commentators suggested that IT specialists, especially those developing large projects, undergo certification to ensure coherent planning. The President’s Council on Year 2000 Conversion was demobilized after February 29, but the Y2K bug continued to have direct and indirect effects on business. Many organizations had deferred computer data entry and innovations in order to devote employees to Y2K remediation. For example, the stock exchange delayed its planned conversion of stock quotes from 866

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fractions to dollars and cents. Following the New Year businesses had to clear up the work backlog. Moreover, according to de Jager and other analysts, the programming techniques used to remedy Y2K dating problems were stopgaps, often not coordinated between computer systems and potentially only temporarily effective. Windowing and time shifting could insinuate subtle changes into computer codes, changes that might not cause problems for decades. Bibliography De Jager, Peter. “Y2K: So Many Bugs . . . So Little Time.” Scientific American (January, 1999): 88-93. Although de Jager’s forecast about Y2K was far too pessimistic, his technical explanation of the computer problems is thorough and geared toward business computing and record keeping. JD Consulting. Y2K Procrastinator’s Guide. Rockland, Mass.: Charles River Media, 2000. The introduction of this book lucidly explains the source and nature of the date problem in business computers and embedded computer chips. Kuo, L. Jay, and Edward M. Dua. Crisis Investing for the Year 2000: How to Profit from the Coming Y2K Computer Crash. Secaucus, N.J.: Birch Lane Press, 1999. After offering a balanced summary of the computer problem for business people, the authors discuss potential economic developments in detail. McGuigan, Dermot, and Beverly Jacobson. Y2K and Y-O-U: A Sane Person’s Home-Preparation Guide. White River Junction, Vt.: Chelsea Green Publishing, 1999. An example, sensible and practical, of the better-safe-than-sorry advice to people worried about the millennium transition. Yourdon, Edward, and Jennifer Yourdon. Time Bomb 2000. 2d ed. Upper Saddle River, N.J.: Prentice Hall PTR, 1999. An example of a gloomy assessment of Y2K risks to most segments of society. Roger Smith Cross-References Jobs and Wozniak Found Apple Computer (1976); IBM Introduces Its Personal Computer (1981); Dow Jones Adds Microsoft and Intel (1999).

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Chronological List of Events 1897 1901 1903 1903 1905 1906 1908 1909 1911 1911 1913 1913 1913 1914 1914 1914 1914 1916 1920 1923 1923 1924 1924 1924 1926 1929 1929 1932 1933 1933 1933 1934 1934 1934 1935 1935 1935

The Wall Street Journal Prints the Dow Jones Industrial Average . . Discovery of Oil at Spindletop Transforms the Oil Industry . . . . . Champion v. Ames Upholds Federal Powers to Regulate Commerce . The U.S. Government Creates the Department of Commerce and Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Supreme Court Strikes Down a Maximum Hours Law . . . . . Congress Passes the Pure Food and Drug Act . . . . . . . . . . . . Harvard University Founds a Business School . . . . . . . . . . . . Congress Updates Copyright Law in 1909 . . . . . . . . . . . . . . The Triangle Shirtwaist Factory Fire Prompts Labor Reforms . . . . The Supreme Court Decides to Break Up Standard Oil . . . . . . . Advertisers Adopt a Truth in Advertising Code . . . . . . . . . . . . Ford Implements Assembly Line Production . . . . . . . . . . . . . The Federal Reserve Act Creates a U.S. Central Bank . . . . . . . . The Panama Canal Opens . . . . . . . . . . . . . . . . . . . . . . . The Federal Trade Commission Is Organized . . . . . . . . . . . . . Congress Passes the Clayton Antitrust Act . . . . . . . . . . . . . . Labor Unions Win Exemption from Antitrust Laws . . . . . . . . . The United States Establishes a Permanent Tariff Commission . . . Station KDKA Introduces Commercial Radio Broadcasting . . . . . The A. C. Nielsen Company Pioneers in Marketing and Media Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Supreme Court Rules Against Minimum Wage Laws . . . . . . IBM Changes Its Name and Product Line . . . . . . . . . . . . . . Congress Restricts Immigration with 1924 Legislation . . . . . . . . The Teapot Dome Scandal Prompts Reforms in the Oil Industry . . The Railway Labor Act Provides for Mediation of Labor Disputes . Congress Passes the Agricultural Marketing Act . . . . . . . . . . . The U.S. Stock Market Crashes on Black Tuesday . . . . . . . . . . The Norris-LaGuardia Act Adds Strength to Labor Organizations . . The U.S. Government Creates the Tennessee Valley Authority . . . . The Banking Act of 1933 Reorganizes the American Banking System . . . . . . . . . . . . . . . . . . . . . . . . . . . The National Industrial Recovery Act Is Passed . . . . . . . . . . . The Securities Exchange Act Establishes the SEC . . . . . . . . . . Congress Establishes the Federal Communications Commission . . Congress Passes the Federal Credit Union Act . . . . . . . . . . . . The Wagner Act Promotes Union Organization . . . . . . . . . . . . The Social Security Act Provides Benefits for Workers . . . . . . . The Banking Act of 1935 Centralizes U.S. Monetary Control . . . .

871

. . . 1 . . . 7 . . . 13 . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . .

20 . 26 . 33 . 40 . 47 . 54 . 60 . 67 . 73 . 81 . 88 . 94 101 110 117 123

. . . . . . . . . .

. . . . . . . . . .

129 135 142 149 156 164 172 179 186 193

. . . . . . . .

. . . . . . . .

201 209 217 224 231 238 245 252

Landmarks in Modern American Business 1935 1936 1938 1939 1942 1942 1944 1946 1947 1947 1947 1949 1950 1950 1953 1954 1955 1958 1959 The 1960’s The 1960’s 1961 1963 1963 1964 1964 1964 1965 1965 1965 1965 1965 1967 1968 1969 1969 The 1970’s The 1970’s 1970 1970 1970 1970 1970 1970 1971 1971 1971 1972

The CIO Begins Unionizing Unskilled Workers . . . . . . . . . . The DC-3 Opens a New Era of Commercial Air Travel . . . . . . Roosevelt Signs the Fair Labor Standards Act . . . . . . . . . . . The 1939 World’s Fair Introduces Regular U.S. Television Service Roosevelt Signs the Emergency Price Control Act . . . . . . . . . The United States Begins the Bracero Program . . . . . . . . . . Roosevelt Signs the G.I. Bill . . . . . . . . . . . . . . . . . . . . Truman Orders the Seizure of Railways . . . . . . . . . . . . . . The Truman Administration Launches the Marshall Plan . . . . . The Taft-Hartley Act Passes over Truman’s Veto . . . . . . . . . . The General Agreement on Tariffs and Trade Is Signed . . . . . . Diners Club Begins a New Industry . . . . . . . . . . . . . . . . The First Homeowner’s Insurance Policies Are Offered . . . . . . The Celler-Kefauver Act Amends Antitrust Legislation . . . . . . Congress Creates the Small Business Administration . . . . . . . Eisenhower Begins the Food for Peace Program . . . . . . . . . . The AFL and CIO Merge . . . . . . . . . . . . . . . . . . . . . . Congress Sets Standards for Chemical Additives in Food . . . . . The Landrum-Griffin Act Targets Union Corruption . . . . . . . . Firms Begin Replacing Skilled Laborers with Automatic Tools . . The U.S. Service Economy Emerges . . . . . . . . . . . . . . . . The Agency for International Development Is Established . . . . . Congress Passes the Equal Pay Act . . . . . . . . . . . . . . . . . GPU Announces Plans for a Commercial Nuclear Reactor . . . . Hoffa Negotiates a National Trucking Agreement . . . . . . . . . The Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy . . . The Civil Rights Act Prohibits Discrimination in Employment . . American and Mexican Companies Form Maquiladoras . . . . . Johnson Signs the Medicare and Medicaid Amendments . . . . . Congress Limits the Use of Billboards . . . . . . . . . . . . . . . Congress Passes the Motor Vehicle Air Pollution Control Act . . . Nader’s Unsafe at Any Speed Launches a Consumer Movement . Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska . . . . . Congress Passes the Consumer Credit Protection Act . . . . . . . The United States Bans Cyclamates from Consumer Markets . . . The Banning of DDT Signals New Environmental Awareness . . . Health Consciousness Creates Huge New Markets . . . . . . . . . The U.S. Government Reforms Child Product Safety Laws . . . . Amtrak Takes Over Most U.S. Intercity Train Traffic . . . . . . . The U.S. Government Bans Cigarette Ads on Broadcast Media . . Congress Passes the RICO Act . . . . . . . . . . . . . . . . . . . Congress Passes the Fair Credit Reporting Act . . . . . . . . . . . The Environmental Protection Agency Is Created . . . . . . . . . Nixon Signs the Occupational Safety and Health Act . . . . . . . The United States Suffers Its First Trade Deficit Since 1888 . . . The Supreme Court Orders the End of Discrimination in Hiring . Independent Agency Takes Over U.S. Postal Service, An . . . . . Nixon Signs the Consumer Product Safety Act . . . . . . . . . . .

872

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

259 266 273 280 287 295 301 309 315 322 329 335 341 348 354 361 368 375 382 389 395 401 408 415 423 429 436 443 451 459 465 471 478 484 491 497 503 509 516 523 531 537 544 551 558 565 573 581

Chronological List of Events 1974 1974 1975 1976 1976 1977 1977 1978 1978 1979 1979 The 1980’s The 1980’s The 1980’s The 1980’s 1980-1982 1980 1981 1981 1981 1981 1982 1983 1984 1985 1986 1986 1986 1987 1988 1989 1989 1989 1990 1990 1994 mid-1990’s 1999 1999 1999 2000 2000

The United States Plans to Cut Dependence on Foreign Oil . . . . The Employee Retirement Income Security Act of 1974 Is Passed Congress Prohibits Discrimination in the Granting of Credit . . . . Jobs and Wozniak Found Apple Computer . . . . . . . . . . . . . Murdoch Extends His Media Empire to the United States . . . . . AT&T and GTE Install Fiber-Optic Telephone Systems . . . . . . The Alaskan Oil Pipeline Opens . . . . . . . . . . . . . . . . . . Carter Signs the Airline Deregulation Act . . . . . . . . . . . . . The Pregnancy Discrimination Act Extends Employment Rights . The Three Mile Island Accident Prompts Reforms in Nuclear Power . . . . . . . . . . . . . . . . . . . . . . . . . . The Supreme Court Rules on Affirmative Action Programs . . . . American Firms Adopt Japanese Manufacturing Techniques . . . . CAD/CAM Revolutionizes Engineering and Manufacturing . . . . Defense Cutbacks Devastate the U.S. Aerospace Industry . . . . . Electronic Technology Creates the Possibility of Telecommuting . Congress Deregulates Banks and Savings and Loans . . . . . . . . The Cable News Network Debuts . . . . . . . . . . . . . . . . . . Reagan Promotes Supply-Side Economics . . . . . . . . . . . . . Federal Regulators Authorize Adjustable-Rate Mortgages . . . . . Air Traffic Controllers of PATCO Declare a Strike . . . . . . . . . IBM Introduces Its Personal Computer . . . . . . . . . . . . . . . AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement . Compact Discs Reach the Market . . . . . . . . . . . . . . . . . . Firefighters v. Stotts Upholds Seniority Systems . . . . . . . . . . Home Shopping Service Is Offered on Cable Television . . . . . . The Supreme Court Upholds Quotas as a Remedy for Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . Insider Trading Scandals Mar the Emerging Junk Bond Market . . The Immigration Reform and Control Act Is Signed into Law . . . The U.S. Stock Market Crashes on 1987’s “Black Monday” . . . . Drexel and Michael Milken Are Charged with Insider Trading . . Mexico Renegotiates Debt to U.S. Banks . . . . . . . . . . . . . . Bush Responds to the Savings and Loan Crisis . . . . . . . . . . . Sony Purchases Columbia Pictures . . . . . . . . . . . . . . . . . Bush Signs the Americans with Disabilities Act of 1990 . . . . . . Bush Signs the Clean Air Act of 1990 . . . . . . . . . . . . . . . The North American Free Trade Agreement Goes into Effect . . . Cable Television Rises to Challenge Network Television . . . . . Time Magazine Makes an E-commerce Pioneer Its Person of the Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dow Jones Adds Microsoft and Intel . . . . . . . . . . . . . . . . Awarding of an NFL Franchise to Houston Raises the Ante in Professional Sports . . . . . . . . . . . . . . . . . . . . . . . . The Y2K Crisis Finally Arrives . . . . . . . . . . . . . . . . . . . Federal Court Rules That Microsoft Should Be Split into Two Companies . . . . . . . . . . . . . . . . . . . . . . . . .

873

. . . . . . . . .

. . . . . . . . .

. . . . . . . . .

588 595 602 609 615 621 628 634 641

. . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . .

647 655 662 669 676 683 691 698 705 712 719 726 734 740 747 754

. . . . . . . . . . . .

. . . . . . . . . . . .

. . . . . . . . . . . .

761 768 776 783 789 796 802 809 816 824 831 837

. . . 844 . . . 850 . . . 856 . . . 862 . . . 868

Alphabetical List of Events CAD/CAM Revolutionizes Engineering and Manufacturing, 669 Carter Signs the Airline Deregulation Act, 634 Celler-Kefauver Act Amends Antitrust Legislation, The, 348 Champion v. Ames Upholds Federal Powers to Regulate Commerce, 13 CIO Begins Unionizing Unskilled Workers, The, 259 Civil Rights Act Prohibits Discrimination in Employment, The, 436 Compact Discs Reach the Market, 740 Congress Creates the Small Business Administration, 354 Congress Deregulates Banks and Savings and Loans, 691 Congress Establishes the Federal Communications Commission, 224 Congress Limits the Use of Billboards, 459 Congress Passes the Agricultural Marketing Act, 172 Congress Passes the Clayton Antitrust Act, 101 Congress Passes the Consumer Credit Protection Act, 484 Congress Passes the Equal Pay Act, 408 Congress Passes the Fair Credit Reporting Act, 537 Congress Passes the Federal Credit Union Act, 231 Congress Passes the Motor Vehicle Air Pollution Control Act, 465 Congress Passes the Pure Food and Drug Act, 33 Congress Passes the RICO Act, 531 Congress Prohibits Discrimination in the Granting of Credit, 602 Congress Restricts Immigration with 1924 Legislation, 149

A. C. Nielsen Company Pioneers in Marketing and Media Research, The, 129 Advertisers Adopt a Truth in Advertising Code, 67 AFL and CIO Merge, The, 368 Agency for International Development Is Established, The, 401 Air Traffic Controllers of PATCO Declare a Strike, 719 Alaskan Oil Pipeline Opens, The, 628 American and Mexican Companies Form Maquiladoras, 443 American Firms Adopt Japanese Manufacturing Techniques, 662 Amtrak Takes Over Most U.S. Intercity Train Traffic, 516 AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement, 734 AT&T and GTE Install Fiber-Optic Telephone Systems, 621 Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska, 478 Awarding of an NFL Franchise to Houston Raises the Ante, 856 Banking Act of 1933 Reorganizes the American Banking System, The, 201 Banking Act of 1935 Centralizes U.S. Monetary Control, The, 252 Banning of DDT Signals New Environmental Awareness, The, 497 Bush Responds to the Savings and Loan Crisis, 802 Bush Signs the Americans with Disabilities Act of 1990, 816 Bush Signs the Clean Air Act of 1990, 824 Cable News Network Debuts, The, 698 Cable Television Rises to Challenge Network Television, 837

874

Alphabetical List of Events Harvard University Founds a Business School, 40 Health Consciousness Creates Huge New Markets, 503 Hoffa Negotiates a National Trucking Agreement, 423 Home Shopping Service Is Offered on Cable Television, 754

Congress Sets Standards for Chemical Additives in Food, 375 Congress Updates Copyright Law in 1909, 47 DC-3 Opens a New Era of Commercial Air Travel, The, 266 Defense Cutbacks Devastate the U.S. Aerospace Industry, 676 Diners Club Begins a New Industry, 335 Discovery of Oil at Spindletop Transforms the Oil Industry, 7 Dow Jones Adds Microsoft and Intel, 850 Drexel and Michael Milken Are Charged with Insider Trading, 789

IBM Changes Its Name and Product Line, 142 IBM Introduces Its Personal Computer, 726 Immigration Reform and Control Act Is Signed into Law, The, 776 An Independent Agency Takes Over U.S. Postal Service, 573 Insider Trading Scandals Mar the Emerging Junk Bond Market, 768

Eisenhower Begins the Food for Peace Program, 361 Electronic Technology Creates the Possibility of Telecommuting, 683 Employee Retirement Income Security Act of 1974 Is Passed, The, 595 Environmental Protection Agency Is Created, The, 544

Jobs and Wozniak Found Apple Computer, 609 Johnson Signs the Medicare and Medicaid Amendments, 451 Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy, The, 429

Federal Court Rules That Microsoft Should Be Split into Two Companies, 868 Federal Regulators Authorize AdjustableRate Mortgages, 712 Federal Reserve Act Creates a U.S. Central Bank, The, 81 Federal Trade Commission Is Organized, The, 94 Firefighters v. Stotts Upholds Seniority Systems, 747 Firms Begin Replacing Skilled Laborers with Automatic Tools, 389 First Homeowner’s Insurance Policies Are Offered, The, 341 Ford Implements Assembly Line Production, 73

Labor Unions Win Exemption from Antitrust Laws, 110 Landrum-Griffin Act Targets Union Corruption, The, 382 Mexico Renegotiates Debt to U.S. Banks, 796 Murdoch Extends His Media Empire to the United States, 615 Nader’s Unsafe At Any Speed Launches a Consumer Movement, 471 National Industrial Recovery Act Is Passed, The, 209 1939 World’s Fair Introduces Regular U.S. Television Service, The, 280 Nixon Signs the Consumer Product Safety Act, 581 Nixon Signs the Occupational Safety and Health Act, 551

General Agreement on Tariffs and Trade Is Signed, The, 329 GPU Announces Plans for a Commercial Nuclear Reactor, 415

875

Landmarks in Modern American Business Three Mile Island Accident Prompts Reforms in Nuclear Power, The, 647 Time Magazine Makes an E-commerce Pioneer Its Person of the Year, 844 Triangle Shirtwaist Factory Fire Prompts Labor Reforms, The, 54 Truman Administration Launches the Marshall Plan, The, 315 Truman Orders the Seizure of Railways, 309

Norris-LaGuardia Act Adds Strength to Labor Organizations, The, 186 North American Free Trade Agreement Goes into Effect, The, 831 Panama Canal Opens, The, 88 Pregnancy Discrimination Act Extends Employment Rights, The, 641 Railway Labor Act Provides for Mediation of Labor Disputes, The, 164 Reagan Promotes Supply-Side Economics, 705 Roosevelt Signs the Emergency Price Control Act, 287 Roosevelt Signs the Fair Labor Standards Act, 273 Roosevelt Signs the G.I. Bill, 301

United States Bans Cyclamates from Consumer Markets, The, 491 United States Begins the Bracero Program, The, 295 United States Establishes a Permanent Tariff Commission, The, 117 United States Plans to Cut Dependence on Foreign Oil, The, 588 United States Suffers Its First Trade Deficit Since 1888, The, 558 U.S. Government Bans Cigarette Ads on Broadcast Media, The, 523 U.S. Government Creates the Department of Commerce and Labor, The, 20 U.S. Government Creates the Tennessee Valley Authority, The, 193 U.S. Government Reforms Child Product Safety Laws, The, 509 U.S. Service Economy Emerges, The, 395 U.S. Stock Market Crashes on 1987’s “Black Monday”, The, 783 U.S. Stock Market Crashes on Black Tuesday, The, 179

Securities Exchange Act Establishes the SEC, The, 217 Social Security Act Provides Benefits for Workers, The, 245 Sony Purchases Columbia Pictures, 809 Station KDKA Introduces Commercial Radio Broadcasting, 123 Supreme Court Decides to Break Up Standard Oil, The, 60 Supreme Court Orders the End of Discrimination in Hiring, The, 565 Supreme Court Rules Against Minimum Wage Laws, The, 135 Supreme Court Rules on Affirmative Action Programs, The, 655 Supreme Court Strikes Down a Maximum Hours Law, The, 26 Supreme Court Upholds Quotas as a Remedy for Discrimination, The, 761

Wagner Act Promotes Union Organization, The, 238 Wall Street Journal Prints the Dow Jones Industrial Average, The, 1

Taft-Hartley Act Passes over Truman’s Veto, The, 322 Teapot Dome Scandal Prompts Reforms in the Oil Industry, The, 156

Y2K Crisis Finally Arrives, The, 862

876

Category Index Nader’s Unsafe at Any Speed Launches a Consumer Movement, 471 Nixon Signs the Consumer Product Safety Act, 581 Three Mile Island Accident Prompts Reforms in Nuclear Power, The, 647 United States Bans Cyclamates from Consumer Markets, The, 491 U.S. Government Reforms Child Product Safety Laws, The, 509

ADVERTISING Advertisers Adopt a Truth in Advertising Code, 67 Congress Limits the Use of Billboards, 459 Station KDKA Introduces Commercial Radio Broadcasting, 123 U.S. Government Bans Cigarette Ads on Broadcast Media, The, 523 BUSINESS PRACTICES Awarding of an NFL Franchise to Houston Raises the Ante in Professional Sports, 856 Congress Passes the RICO Act, 531 Congress Updates Copyright Law in 1909, 47 Drexel and Michael Milken Are Charged with Insider Trading, 789 Electronic Technology Creates the Possibility of Telecommuting, 683 Insider Trading Scandals Mar the Emerging Junk Bond Market, 768

FINANCE Banking Act of 1933 Reorganizes the American Banking System, The, 201 Banking Act of 1935 Centralizes U.S. Monetary Control, The, 252 Bush Responds to the Savings and Loan Crisis, 802 Congress Deregulates Banks and Savings and Loans, 691 Congress Passes the Consumer Credit Protection Act, 484 Congress Passes the Fair Credit Reporting Act, 537 Congress Passes the Federal Credit Union Act, 231 Congress Prohibits Discrimination in the Granting of Credit, 602 Dow Jones Adds Microsoft and Intel, 850 Drexel and Michael Milken Are Charged with Insider Trading, 789 Federal Regulators Authorize Adjustable-Rate Mortgages, 712 Federal Reserve Act Creates a U.S. Central Bank, The, 81 Insider Trading Scandals Mar the Emerging Junk Bond Market, 768 Mexico Renegotiates Debt to U.S. Banks, 796 Securities Exchange Act Establishes the SEC, The, 217

CONSUMER AFFAIRS Banning of DDT Signals New Environmental Awareness, The, 497 Bush Signs the Clean Air Act of 1990, 824 Congress Passes the Consumer Credit Protection Act, 484 Congress Passes the Fair Credit Reporting Act, 537 Congress Passes the Pure Food and Drug Act, 33 Congress Prohibits Discrimination in the Granting of Credit, 602 Congress Sets Standards for Chemical Additives in Food, 375 Environmental Protection Agency Is Created, The, 544

877

Landmarks in Modern American Business Reagan Promotes Supply-Side Economics, 705 Roosevelt Signs the Emergency Price Control Act, 287 Roosevelt Signs the G.I. Bill, 301 Supreme Court Rules Against Minimum Wage Laws, The, 135 Teapot Dome Scandal Prompts Reforms in the Oil Industry, The, 156 Truman Administration Launches the Marshall Plan, The, 315 Truman Orders the Seizure of Railways, 309 U.S. Government Creates the Department of Commerce and Labor, The, 20 U.S. Government Creates the Tennessee Valley Authority, The, 193 Y2K Crisis Finally Arrives, The, 862

U.S. Stock Market Crashes on 1987’s “Black Monday,” The, 783 U.S. Stock Market Crashes on Black Tuesday, The, 179 Wall Street Journal Prints the Dow Jones Industrial Average, The, 1 FOUNDINGS AND DISSOLUTIONS Defense Cutbacks Devastate the U.S. Aerospace Industry, 676 IBM Changes Its Name and Product Line, 142 Jobs and Wozniak Found Apple Computer, 609 Murdoch Extends His Media Empire to the United States, 615 GOVERNMENT AND BUSINESS Agency for International Development Is Established, The, 401 Amtrak Takes Over Most U.S. Intercity Train Traffic, 516 Bush Responds to the Savings and Loan Crisis, 802 Bush Signs the Americans with Disabilities Act of 1990, 816 Congress Creates the Small Business Administration, 354 Congress Establishes the Federal Communications Commission, 224 Congress Passes the Agricultural Marketing Act, 172 Congress Passes the Clayton Antitrust Act, 101 Congress Passes the Motor Vehicle Air Pollution Control Act, 465 Environmental Protection Agency Is Created, The, 544 Federal Trade Commission Is Organized, The, 94 Independent Agency Takes Over U.S. Postal Service, An, 573 Johnson Signs the Medicare and Medicaid Amendments, 451 Kennedy-Johnson Tax Cuts Stimulate the U.S. Economy, The, 429 National Industrial Recovery Act Is Passed, The, 209

INTERNATIONAL BUSINESS AND COMMERCE Agency for International Development Is Established, The, 401 American and Mexican Companies Form Maquiladoras, 443 Eisenhower Begins the Food for Peace Program, 361 General Agreement on Tariffs and Trade Is Signed, The, 329 North American Free Trade Agreement Goes into Effect, The, 831 Truman Administration Launches the Marshall Plan, The, 315 United States Establishes a Permanent Tariff Commission, The, 117 United States Plans to Cut Dependence on Foreign Oil, The, 588 United States Suffers Its First Trade Deficit Since 1888, The, 558 LABOR AFL and CIO Merge, The, 368 Air Traffic Controllers of PATCO Declare a Strike, 719 CIO Begins Unionizing Unskilled Workers, The, 259 Civil Rights Act Prohibits Discrimination in Employment, The, 436

878

Category Index Wagner Act Promotes Union Organization, The, 238

Congress Passes the Equal Pay Act, 408 Congress Restricts Immigration with 1924 Legislation, 149 Electronic Technology Creates the Possibility of Telecommuting, 683 Employee Retirement Income Security Act of 1974 Is Passed, The, 595 Firefighters v. Stotts Upholds Seniority Systems, 747 Firms Begin Replacing Skilled Laborers with Automatic Tools, 389 Hoffa Negotiates a National Trucking Agreement, 423 Immigration Reform and Control Act Is Signed into Law, The, 776 Labor Unions Win Exemption from Antitrust Laws, 110 Landrum-Griffin Act Targets Union Corruption, The, 382 Nixon Signs the Occupational Safety and Health Act, 551 Norris-LaGuardia Act Adds Strength to Labor Organizations, The, 186 Pregnancy Discrimination Act Extends Employment Rights, The, 641 Railway Labor Act Provides for Mediation of Labor Disputes, The, 164 Roosevelt Signs the Fair Labor Standards Act, 273 Social Security Act Provides Benefits for Workers, The, 245 Supreme Court Orders the End of Discrimination in Hiring, The, 565 Supreme Court Rules Against Minimum Wage Laws, The, 135 Supreme Court Rules on Affirmative Action Programs, The, 655 Supreme Court Strikes Down a Maximum Hours Law, The, 26 Supreme Court Upholds Quotas as a Remedy for Discrimination, The, 761 Taft-Hartley Act Passes over Truman’s Veto, The, 322 Triangle Shirtwaist Factory Fire Prompts Labor Reforms, The, 54 United States Begins the Bracero Program, The, 295 U.S. Service Economy Emerges, The, 395

MANAGEMENT Harvard University Founds a Business School, 40 MANUFACTURING American Firms Adopt Japanese Manufacturing Techniques, 662 CAD/CAM Revolutionizes Engineering and Manufacturing, 669 Firms Begin Replacing Skilled Laborers with Automatic Tools, 389 Ford Implements Assembly Line Production, 73 MARKETING A. C. Nielsen Company Pioneers in Marketing and Media Research, The, 129 Diners Club Begins a New Industry, 335 Health Consciousness Creates Huge New Markets, 503 Home Shopping Service Is Offered on Cable Television, 754 Time Magazine Makes an E-commerce Pioneer Its Person of the Year, 844 MERGERS AND ACQUISITIONS Sony Purchases Columbia Pictures, 809 MONOPOLIES AND CARTELS AT&T Agrees to Be Broken Up as Part of an Antitrust Settlement, 734 Celler-Kefauver Act Amends Antitrust Legislation, The, 348 Congress Passes the Clayton Antitrust Act, 101 Federal Court Rules That Microsoft Should Be Split into Two Companies, 868 Supreme Court Decides to Break Up Standard Oil, The, 60 NEW PRODUCTS AT&T and GTE Install Fiber-Optic Telephone Systems, 621

879

Landmarks in Modern American Business RETAILING Champion v. Ames Upholds Federal Powers to Regulate Commerce, 13

Atlantic Richfield Discovers Oil at Prudhoe Bay, Alaska, 478 Cable News Network Debuts, The, 698 Cable Television Rises to Challenge Network Television, 837 Compact Discs Reach the Market, 740 DC-3 Opens a New Era of Commercial Air Travel, The, 266 Discovery of Oil at Spindletop Transforms the Oil Industry, 7 First Homeowner’s Insurance Policies Are Offered, The, 341 GPU Announces Plans for a Commercial Nuclear Reactor, 415 IBM Introduces Its Personal Computer, 726 1939 World’s Fair Introduces Regular U.S. Television Service, The, 280 Station KDKA Introduces Commercial Radio Broadcasting, 123 U.S. Service Economy Emerges, The, 395

TRANSPORTATION Alaskan Oil Pipeline Opens, The, 628 Amtrak Takes Over Most U.S. Intercity Train Traffic, 516 Bush Signs the Clean Air Act of 1990, 824 Carter Signs the Airline Deregulation Act, 634 Congress Passes the Motor Vehicle Air Pollution Control Act, 465 DC-3 Opens a New Era of Commercial Air Travel, The, 266 Panama Canal Opens, The, 88 Truman Orders the Seizure of Railways, 309

880

Principal Personages Acheson, Dean, 315 Akers, John, 726 Altmeyer, Arthur, 245 Anderson, Clinton P., 451 Anderson, Robert O., 478, 628 Annunzio, Frank, 602 Ash, Roy L., 544 Atherton, Warren, 301 Avery, Clarence, 73 Ayres, Richard, 824 Babson, Roger W., 179 Baker, George F., 40 Baker, James A., III, 783 Banzhaf, John F., III, 523 Barden, Graham Arthur, 382 Barksdale, James, 868 Basch, Bert E., 621 Baucus, Max, 824 Baxter, William F., 734 Beaudette, Richard A., 621 Bemer, Robert, 862 Bennett, W. R., 740 Bennett, Wallace, 523 Benson, Ezra Taft, 361 Bergengren, Roy F., 231 Bergstresser, Charles Milford, 1 Beveridge, Albert J., 13 Bewkes, Jeffrey L., 837 Biden, Joe, 602 Black, Eugene, 252 Blackmun, Harry A., 747 Blakey, G. Robert, 531 Blanck, Max, 54 Bloomingdale, Alfred, 335 Blount, Winton M., 573 Bodenheimer, George, 837

Boesky, Ivan, 768, 789 Boggs, Lindy, 602 Borah, William E., 209 Bork, Robert H., 348 Borsini, Fred, 669 Bowles, Chester, 287 Brady, Nicholas, 783 Brainard, Morgan Bulkeley, 341 Brandeis, Louis D., 94, 101, 110, 186 Breeden, Richard C., 802 Brennan, William J., Jr., 655, 761 Brinkley, Parke C., 544 Broad, Eli, 856 Brock, William, 602 Brown, Charles L., 734 Brown, Gordon, 389 Brown, Prentiss M., 287 Burger, Warren, 565, 761 Burns, Arthur, 558 Bush, George, 676, 802, 816, 824, 831 Byrd, Harry F., 401 Byrd, Robert C., 824 Byrnes, James F., 287 Capper, Arthur, 231 Carnes, Howard, 621 Carson, Anton Julius, 375 Carson, Rachel, 497, 503 Carter, Jimmy, 551, 588, 634, 641, 647, 691, 776 Cary, Frank, 726 Celler, Emanuel, 348, 436, 747 Chafee, John H., 824 Chandler, Otis, 615 Charren, Peggy, 509

881

Chase, David, 837 Cheney, Richard, 676 Chrétien, Jean, 831 Clark, Joel Bennett, “Champ,” 301 Clay, William, 719 Clayton, Henry D., 101 Clayton, William L., 315 Clifford, Clark, 309 Clinton, Bill, 831 Coelho, Tony, 816 Collins, Joseph, 837 Connor, John Thomas, 459 Conrad, Frank, 123 Coolidge, Calvin, 156, 164 Copeland, Melvin T., 40 Cortelyou, George B., 20 Couzens, James, 73 Cranston, Alan, 537 Cullinan, Joseph S., 7 Cullman, Joseph, III, 523 Dalton, John H., 712 Daniels, Josephus, 156 Darrow, Clarence, 209 Daugherty, Harry, 110, 164 Davis, Adelle, 503 Davis, Al, 856 De Jager, Peter, 862 Dekker, Wisse, 740 Delaney, James J., 375 Delano, Frederic, 301 De Lesseps, Ferdinand. See Lesseps, Ferdinand de Dent, John H., 595 Desjardins, Alphonse, 231 Diemand, John Anthony, 341 Dillingham, William P., 149 Dillon, Clarence Douglas, 429

Landmarks in Modern American Business

Eads, Gary W., 719 Eccles, Marriner, 252 Echeverría, Luís, 443 Eisenhower, Dwight D., 382, 415 Eliot, Charles William, 40 Ellender, Allen J., 295, 401 Elliot, Anne, 129 Ervin, Samuel James, Jr., 382 Estridge, Philip Don, 726

Galey, John H., 7 Garcia, Robert, 776 Garfield, James R., 20 Garn, Jake, 602, 691 Garrett, David C., 634 Gates, Bill, 868 Gay, Edwin F., 40 Gilder, George, 705 Giuliani, Rudolph, 531, 789 Glass, Carter, 81, 201, 252 Goethals, George Washington, 88 Goldwater, Barry, 382 Gompers, Samuel, 110, 149 Grant, Ulysses S., 88 Green, William, 238, 259, 273 Greene, Harold H., 734 Greenspan, Alan, 783 Griffin, Robert P., 382 Griggs, Willie S., 565 Guber, Peter, 809 Guffey, James M., 7

Fairchild, George, 142 Fall, Albert B., 156 Farnsworth, Philo T., 280 Fawcett, Millicent Garrett, 408 Fessenden, Reginald, 123 Filene, Edward A., 231 Finch, Robert, 491 Fisher, Irving, 179 Fitzsimmons, Frank E., 423 Fletcher, Duncan, 217 Flint, Charles Ranlett, 142 Florio, James, 509 Ford, Gerald R., 588, 595 Ford, Henry, 73 Fox, Mrs. Cyril, 459 Francis, Clarence, 361 Frankfurter, Felix, 135 Fredericks, Carlton, 503 Frye, Jack, 266 Fulbright, William, 354 Fuller, Melville Weston, 13

Haagen-Smit, A. J., 465 Haddon, William, Jr., 471 Hahn, Kenneth, 465 Halliday, Don, 669 Hand, Learned, 47 Hanratty, Patrick, 669 Harding, Warren G., 164 Harkin, Tom, 816 Harlan, John Marshall, 13, 26 Harris, Issac, 54 Haugen, Gilbert, 172 Hauser, Benjamin Gayelord, 503 Heimann, John G., 712 Heller, Walter W., 429 Henderson, Leon, 287 Hendrie, Joseph M., 647 Hesburgh, Theodore, 776 Hickenlooper, Bourke B., 401 Higgins, Patillo, 7 Hill, William S., 361

Dimling, John, 129 Dingell, John D., 544, 824 Dirksen, Everett, 401, 436, 747 Disney, Walt, 395 Dixon, Alan J., 537 Doheny, Edward, 156 Douglas, Donald W., 266 Douglas, Paul, 484 Dow, Charles Henry, 850 Dow, Henry Charles, 1 Dulles, John Foster, 361

882

Hillman, Sidney, 259, 368 Hoffa, Jimmy, 368, 423 Hoffman, Paul G., 315 Holifield, Chester, 415 Hollerith, Herman, 142 Holmes, Oliver Wendell, Jr., 26, 47, 135 Holt, John C., 129 Hoover, Herbert, 164, 172, 179 Hopper, Grace Murray, 862 Hughes, Charles Evans, 149, 238 Hull, Cordell, 329 Humphrey, Hubert H., 436, 565 Hyde, Arthur M., 172 Icahn, Carl, 531 Jackson, Jesse, 565 Jackson, Thomas Penfield, 868 Jacobs, Irwin, 754 Janis, Jay, 712 Javits, Jacob, 595 Jobs, Steven, 395, 609, 726 Johnson, Albert, 149 Johnson, Hugh S., 209 Johnson, Lady Bird, 459 Johnson, Lyndon B., 408, 429, 436, 459, 471, 565, 747 Johnson, Wyatt Thomas “Tom” Johnson, Jr., 698 Johnston, Alvanley, 309 Jones, Edward Davis, 1 Jones, Jesse H., 354 Joseph, Frederick, 789 Kahn, Alfred, 634 Kappel, Frederick R., 573 Kefauver, Estes, 348 Kemp, Jack, 705 Kennan, George F., 315 Kennedy, Edward M., 776 Kennedy, John F., 382, 401, 408, 429

Principal Personages Kennedy, Robert F., 423, 436 Kennedy, William, 615 Kerkorian, Kirk, 698 Kerr, Robert, 451 Keynes, John Maynard, 329, 429 Kilby, Jack St. Clair, 669 King, Cecil R., 451 King, Martin Luther, Jr., 436, 565 Klein, Joel, 868 Knudsen, William S., 73, 287 Koskinen, John A., 862 Kroc, Ray, 395 Laffer, Arthur, 705 La Follette, Robert M., 156 La Guardia, Fiorello Henry, 186 Lamont, Thomas W., 179 Landrum, Philip M., 382 Larrick, George P., 375 Lauer, Robert B., 621 Lawrence, Harding L., 634 Legator, Marvin S., 491 Legge, Alexander, 172 Lehman, Richard H., 537 Lesseps, Ferdinand de, 88 Levine, Dennis, 768, 789 Lewis, Andrew, 719 Lewis, John L., 186, 238, 259, 322, 368 Lewis, Roger, 516 Ley, Herbert, Jr., 491 Lilienthal, David Eli, 193 Lindbergh, Charles A., 266 Lodge, Henry Cabot, 149 Long, Russell B., 595 Longgood, William, 497 Lowell, A. Lawrence, 40 Lucas, Anthony F., 7 McCain, William Ross, 341 McClellan, John L., 382, 423

McCulloch, William, 436 McDonald, George E., 615 McGowen, William J., 734 McManamy, Frank, 224 McNair, Robert “Bob,” 856 McNamara, Francis X., 335 McNary, Charles, 172 Magnuson, Warren Grant, 471, 581 Mann, James Robert, 67 Mansfield, William Murray, 47 Marconi, Guglielmo, 123 Markkula, Mike, 609 Marshall, George C., 315 Marshall, John, 13 Mazzoli, Romano, 776 Meade, James Edward, 329 Meany, George, 368, 382 Mellon, William L., 7 Meyer, Eugene, 252 Milken, Michael, 531, 768, 789 Miller, Thomas W., 683 Mills, Wilbur, 429, 451 Mitchell, Charles E., 179 Mitchell, George, 824 Mitchell, Parren J., 602 Mokhtarian, Patricia Lyon, 683 Mollenhoff, Clark R., 423 Moore, Joseph Hampton, 67 Morehouse, Edward W., 415 Morgan, Arthur E., 193 Morgan, Harcourt B., 193 Morita, Akio, 740, 809 Morse, Wayne, 408 Moss, Frank E., 523 Moss, John E., 581 Moynihan, Daniel Patrick, 862 Müller, Paul Hermann, 497 Mullins, Joseph H., 621 Murdoch, Rupert, 615 Murray, Philip, 259, 368 Muskie, Edmund, 465

883

Nader, Ralph, 465, 471, 503, 509, 595 Neukom, William, 868 Nielsen, A. C., Jr., 129 Nielsen, A. C., Sr., 129 Nilles, Jack M., 683 Nixon, Richard M., 443, 516, 544, 551, 558, 573, 581, 588, 595 Norris, George W., 186, 193 Norton, Eleanor Holmes, 408 Noyce, Robert, 669 O’Brien, Lawrence, 573 Ohga, Norio, 809 Ohno, Taiichi, 662 Ordaz, Gustavo Díaz, 443 Orkun, Serge, 129 Ovitz, Michael, 856 Owen, Robert Latham, 81 Paarlberg, Don, 361 Paley, William S., 123 Palmer, A. Mitchell, 149 Parsons, John, 389 Patman, Wright, 354 Patterson, W. E., 266 Pauling, Linus, 503 Paxson, Lowell W. “Bud,” 754 Pease, William, 389 Peckham, Rufus Wheeler, 26 Pecora, Ferdinand, 201, 217 Pepper, Claude, 408 Percy, Charles, 581 Perkins, Frances, 245, 273 Personick, Stewart D., 621 Peters, Jon, 809 Phelon, John, 783 Pinchot, Gifford, 156 Poage, William R., 295 Poff, Richard H., 484 Poindexter, William, IV, 712 Poli, Robert E., 719 Porter, Paul, 287

Landmarks in Modern American Business Powazinik, William, 621 Pratt, Richard T., 712 Proxmire, William, 484, 537, 602 Pujo, Arsène, 101 Raiffeisen, Friedrich Wilhelm, 231 Randall, Clarence, 361 Randall, Jesse W., 341 Randolph, Asa Philip, 565 Rankin, John, 301 Rayburn, Sam, 217, 382 Reagan, Ronald, 516, 558, 588, 676, 691, 705, 719, 776 Reed, David A., 149 Reenstra, Will A., 621 Rehnquist, William, 531, 655, 761 Reilly, William, 824 Reno, Janet, 868 Reuther, Walter P., 259, 368 Richberg, Donald, 164 Rickenbacker, Edward (Eddie), 266 Rickover, Hyman, 415 Riordan, Richard, 856 Robbins, Lionel Charles, 329 Robertson, A. Willis, 484 Rockefeller, John D., 7, 60 Rockefeller, Laurance Spelman, 459 Roddis, Louis H., Jr., 415 Rodino, Peter, 436, 776 Roosevelt, Franklin D., 193, 209, 217, 224, 238, 245, 273, 280, 287, 301 Roosevelt, Theodore, 20, 33, 88, 94, 101, 117 Roper, Daniel C., 224 Ross, Susan C., 641 Rublee, George, 94 Saffiotti, Umberto, 491 St. Germain, Fernand J., 602, 691

Salas, Octaviano Campos, 443 Salinas de Gortari, Carlos, 831 Sarnoff, David, 123, 280 Saxbe, William, 734 Scalia, Antonin, 761 Scanlon, Terrence, 509 Schiff, Dorothy, 615 Schlesinger, James R., 588 Schneiderman, Rose, 54 Schroeder, Patricia, 602 Schulhof, Michael, 809 Schulze-Delitzsch, F. Hermann, 231 Schumer, Charles, 776 Schwartz, Morton I., 621 Scott, Michael, 609 Scranton, William W., III, 647 Sculley, John, 609 Seidman, L. William, 802 Shaw, Arch W., 40 Sherley, Joseph Swager, 67 Sherman, John, 60 Shingo, Shigeo, 662 Shultz, George P., 551 Simpson, Alan, 776 Sinclair, Harry F., 156 Sinclair, Upton, 33 Smith, Alfred E., 54 Smith, Bradford, Jr., 341 Smith, C. R., 266 Smith, Harold V., 341 Snyder, Ralph, 335 Sorensen, Charles E., 73 Speer, Roy, 754 Spencer, Herbert, 26 Steagall, Henry Bascom, 201 Steelman, John Roy, 309 Steiger, Paul E., 850 Steinbrenner, George, 856 Stevens, Theodore “Ted,” 478, 628 Stewart, Potter, 747 Stone, Harlan Fiske, 273 Story, Joseph, 47 Stotts, Carl, 747

884

Strauss, Lewis L., 415 Strong, Benjamin, 252 Sullivan, Leonor, 484 Sutherland, George, 135 Swartz, Edward M., 509 Sykes, E. O., 224 Taft, Robert A., 309, 322 Taft, William Howard, 135 Talmadge, Herman E., 565 Taussig, Frank William, 40, 117 Terry, Luther, 523 Thornburgh, Dick, 647 Tobin, Daniel J., 423 Tocker, Phillip, 459 Toffler, Alvin, 683 Torres, Esteban Edward, 537 Tower, John, 565 Toyoda, Kiichir0, 662 Train, Russell E., 544 Truly, Richard H., 676 Truman, Harry S, 287, 309, 315, 322, 348 Tugwell, Rexford Guy, 209 Turner, Robert Edward “Ted,” III, 698, 837 Udall, Morris, 478, 628 Underwood, Oscar Wilder, 117 Van Deerlin, Lionel, 224 Vandenberg, Arthur Hendrick, 201 Volcker, Paul A., 691 Volpe, John A., 516 Wagner, Robert F., 54, 209, 238 Walker, Robert John, 117 Wall, Danny M., 802 Walsh, Thomas J., 156 Walsh, Thomas James, 273 Warburg, Paul Moritz, 81 Watson, Thomas J., 142 Watson, Thomas J., Jr., 142

Principal Personages Waxman, Henry A., 824 Weber, Brian, 655 Weinberger, Caspar, 676 White, Byron, 747 White, Edward, 60 Whitney, Alexander Fell, 309 Whitney, Richard, 179, 217 Wickard, Claude R., 295

Wiley, Harvey W., 33 Williams, Harrison, 551, 595 Williams, Wendy, 641 Willis, Henry Parker, 81 Wilson, Kemmons, 395 Wilson, Woodrow, 94, 101, 110, 117 Wirtz, Willard, 295

885

Witte, Edwin, 245 Wozniak, Stephen, 395, 609 Wright, Carroll D., 20 Young, Owen D., 123 Zucker, Joseph, 621 Zworykin, Vladimir, 280

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Subject Index Atlantic Richfield, 478-483 Automation, 389-394 Automobile industry, 73-80, 465-470

A. C. Nielsen Company, 129-134 Additives, 375-381 Adjustable-rate mortgages, 712-718 Adkins v. Children’s Hospital, 135-141 Advertising, 67-72, 459-464 Aerospace industry, 676-682 Affirmative action, 655-661 Agency for International Development, 401-407 Agricultural Marketing Act, 172-178 Agricultural Trade Development and Assistance Act, 361-367 AID. See Agency for International Development Aid programs, 315-321, 361-367, 401-407 Air pollution, 465-470, 824-830 Airline Deregulation Act, 634-640 Airplanes, 266-272 Airways, 634-640, 719-725 Alabama Power Co. v. Ickes, 198 Alaskan oil pipeline, 628-633 Albemarle Paper Company v. Moody, 440 Alexander v. Gardner-Denver, 553 Amazon.com, 844-846 American Federation of Labor, 368-374 American Steel Foundries v. Tri-City Central Trades Council, 187 American Telephone and Telegraph Company, 621-627, 734-739 Americans with Disabilities Act, 816-823 Amtrak, 516-522 Antitrust law, 24, 60-66, 101-109, 110-116, 348-353, 734-739, 868-870 Apex Hosiery Company v. Leader, 189 Apple Computer, 609-614 Ashwander v. Tennessee Valley Authority, 197 Assembly line, 73-80 Associated Advertising Clubs of America, 67-72

Baby bells, 734-739 Bakeshop Act, 27 Bakke case, 657 Balance of trade, 558-564 Bank failures, 201-208 Banking, 81-87, 201-208, 231-237, 252-258, 301-308, 354-360, 484, 537-543, 602-608, 691-697, 712-718, 796-808 Banking Act of 1933, 201-208 Banking Act of 1935, 252-258 Bates v. State Bar of Arizona, 397 Baxter, William F., 735 Bedford Cut Stone Company v. Journeymen Stone Cutters’ Association, 188 Bemer, Robert, 863 Bennett, Wallace, 524 Benson, Ezra Taft, 364-365 Bezos, Jeffrey P., 844-845, 847 Billboards, 459-464 Black, Hugo L., 275 Black market, 783-788 Black Tuesday, 179-185 Bracero program, 295-300 Brandeis, Louis D., 96, 103-104, 114 Broad, Eli, 857 Broadcasting. See Radio broadcasting Burger, Warren, 352, 411, 566, 568, 570, 748, 764 Business machines, 142-148, 609-614, 683-690, 726-733 Business schools, 40-46 Cable Act, 838 Cable News Network, 698-704, 839

887

Landmarks in Modern American Business Danbury Hatters’ Case, 111, 187 Daugherty, Harry, 115, 165 Davis, Al, 857 DC-3, 266-272 DDT, 497-502 Debs, Eugene, 111 Debt Renegotiation, 796-801 de Jager, Peter, 863, 866-867 Delaney Amendment, 375-381 Department of Commerce, 20-25 Department of Commerce and Labor, 20-25 Department of Labor, 20-25 Depository Institutions Act of 1982, 691-697 Depository Institutions Deregulation and Monetary Control Act, 691-697 Deregulation, 634-640, 691-697 Diners Club, 335-340 Direct broadcast satellite television, 840 DJIA. See Dow Jones Industrial Average Doheny, Edward, 158-159 Douglas, Paul, 485-488 Douglas Aircraft Company, 266-272 Dow Jones Industrial Average, 1-6, 850-855 Drexel Burnham Lambert, 768-775, 789-795 Duplex Printing Press Company v. Deering, 114-115, 187

Cable television, 698-704, 754-760, 837-843, 859 Case, Clifford, 312 Celler-Kefauver Act, 348-353 Central banking, 81-87, 252-258 Central planning, 209-216 Chafee, John H., 826 Champion v. Ames, 13-19 Chemical additives, 375-381 Child Protection Act, 509-515 Child Protection and Toy Safety Act, 509-515 Child safety, 509-515 Cigarettes, 523-530 Civil Rights Act of 1964, 436-442 Clayton, Henry D., 96, 105, 112 Clayton Antitrust Act, 24, 64, 96, 101-109, 110-114, 187-188, 348-353 Clean Air Act of 1990, 824-830 Clifford, Clark, 311 Clinton, Bill, 864 CNN. See Cable News Network COBOL, 863 Collective bargaining, 164-169, 171, 423-428 Columbia Pictures, 809-815 Commerce clause, 13-19 Commercials, 523-530 Commonwealth v. Hunt, 110 Compact discs, 740-746 Computer-aided design and manufacturing, 669-675 Computers, 609-614, 669-675, 726-733, 862-867 Concentrated Industries Act, 107 Congress of Industrial Organizations, 259-265, 368-374 Consumer Credit Protection Act, 484-490 Consumer Product Safety Act, 581-587 Consumer protection, 33-39, 375-381, 485, 491-496, 581-587 Consumerism, 471-477 Copyright Act of 1909, 47-53 Copyright law, 47-53 Credit, 484-490, 537-543, 602-608 Credit cards, 335-340 Credit unions, 231-237 Cyberbusiness. See E-commerce Cyclamates, 491-496

E-commerce, 844-849 Economic development, 401-407, 443-450 Economic Recovery Tax Act of 1981, 705-711 Electric power, 193-200, 415-422 Electronic commerce. See E-commerce Electronic Funds Transfer Act, 489 Electronics, 683-690 Emergency Price Control Act, 287-294 Employee Retirement Income Security Act, 595-601 Engineering, 669-675 Entertainment and Sports Programming Network, 837, 839-840 Environmental concerns, 465-470, 497-502, 544-550, 824-830

888

Subject Index General Telephone and Electronics, 621-627 Gerstner, Louis, 732 Gibbons v. Ogden, 14, 278 Gilbert v. General Electric Corporation, 643 Goldstock, Ronald G., 386 Goldwater, Barry, 383 Gompers, Samuel, 112-114, 152, 259-260, 369 Great Depression, 179-185, 209-216 Griffin, Robert P., 384 Griggs et al. v. Duke Power Company, 440, 565-572, 656, 750-751

Environmental Protection Agency, 544-550 EPA. See Environmental Protection Agency Equal Credit Opportunity Act, 489, 602-608 Equal Pay Act, 408-414 ESPN. See Entertainment and Sports Programming Network Fair Credit Billing Act, 489 Fair Credit Reporting Act, 489, 537-543 Fair Debt Collection Practices Act, 489 Fair Labor Standards Act, 273-279 FCC. See Federal Communications Commission FEA. See Federal Energy Administration Federal Communications Commission, 224-230, 838 Federal Credit Union Act of 1934, 231-237 Federal Energy Administration, 588-594 Federal Farm Board, 172-178 Federal Oil Conservation Board, 156-163 Federal Reserve Act, 81-87 Federal Reserve System, 252-258, 487 Federal Tariff Commission, 117-122 Federal Trade Commission, 94-100, 485 Fiber optics, 621-627 Financial Institutions Rescue, Recovery, and Enforcement Act, 802-808 Finch, Robert, 491, 494 Firefighters v. Stotts, 747-753 Fiscal policy, 429-435, 705-711 Fitness industry, 503-508 Food for Peace, 361-367 Food, Drug, and Cosmetic Act, 375-381 Ford Motor Company, 73-80 FTC. See Federal Trade Commission Fulbright, William, 355

Hammer v. Dagenhart, 16, 278 Harlan, John Marshall, 29 Harvard Business School, 40-46 Haymarket Square bombing, 111 HBO. See Home Box Office Health care, 451-458 Health consciousness, 503-508 Health food, 503-508 Heart of Atlanta Motel v. United States, 17 Highway Beautification Act, 459-464 Hitchman Coal Company v. Mitchell, 187 Hoffa, Jimmy, 423-428 Holifield, Chester, 417 Home Box Office, 837-839 Home ownership, 301-308 Home Shopping Network, 754-760 HomeGrocer, 845 Homeowner’s insurance, 341-347 Hopper, Grace Murray, 863 IBM. See International Business Machines Immigration, 149-155, 295-300, 776-782 Immigration Act of 1924, 149-155 Immigration Reform and Control Act of 1986, 776-782 Inflation, 712-718 Information technology, 865 Insider trading, 531-536, 768-775, 789-795 Insurance, 245-251, 341-347 Intel, 671-672, 727-728, 731, 850-855 International Business Machines, 142-148, 726-733, 851-852, 863 Internet, 839, 844-849

Gates, Bill, 868-870 GATT. See General Agreement on Tariffs and Trade General Agreement on Tariffs and Trade, 329-334 General Electric, 850 General Public Utilities Corporation, 415-422

889

Landmarks in Modern American Business McNamara, Francis X., 335, 337, 339 Mail delivery, 573-580 Management theory, 40-46, 662-668 Maquiladoras, 443-450 Marshall Plan, 315-321 Mass production, 73-80 Maximum hours laws, 26-32 Mazzoli, Romano, 778-779 Medicaid, 451-458 Medical insurance, 451-458 Medicare, 451-458 Mexico, 796-801 Microsoft, 850-855; antitrust suit, 868-870 Military-industrial complex, 676-682 Milken, Michael, 768-775, 789-795 Mills, Wilbur, 452, 597 Minimum wage laws, 135-141 Mollenhoff, Clark R., 427 Monetary policy, 252-258 Morita, Akio, 744, 810 Mortgages, 712-718 Moss, Frank E., 526 Motor Vehicle Air Pollution Control Act, 465-470 Moynihan, Daniel Patrick, 864 Muller v. Oregon, 137 Murdoch, Rupert, 615-620 Music industry, 740-746 Muskie, Edmund, 467

Interstate commerce, 13-19 Interstate Commerce Act, 485 Inventory control, 662-668 Japanese manufacturing techniques, 662-668 Jersey Central Power and Light, 415-422 Johnson v. Santa Clara County Transportation Agency, 764 Jungle, The (Sinclair), 16, 35-37 Junk bonds, 768-775, 789-795 Just-in-time system, 662-668 Kappel, Frederick R., 576 KDKA, 123-128 Kennedy, John F., and consumer protection, 486 Kennedy-Johnson Tax Cuts, 429-435 Keynes, John Maynard, 433 Koskinen, John A., 864 Labor law, 26-32, 110-116, 135-141, 164-171, 186-192, 238-244, 273-279, 322-328, 382-388, 408-414, 436-442, 551-557, 565-572, 595-601, 641-646, 655-661, 719-725, 747-753, 761-767, 776-782, 816-823 Labor reform, 54-59 Labor unions, 259-265, 368-374, 423-428, 719-725 Landrum, Philip M., 384 Landrum-Griffin Act, 382-388 Lauf v. E. G. Shinner and Company, 189 Lilienthal, David Eli, 196-197 Local 93 International Association of Firefighters v. City of Cleveland, 763 Local 28 Sheet Metal Workers International Association v. Equal Employment Opportunity Commission, 763 Lochner v. New York, 26-32

Nader, Ralph, 471-477, 487 NAFTA. See North American Free Trade Agreement Nasdaq, 851, 854 Nashville Gas v. Satty, 643 National Broadcasting Company, 280-286 National Football League, 856-861 National Industrial Recovery Act, 209-216 National Labor Relations Act, 238-244, 322-328 National Labor Relations Board v. Jones & Laughlin Steel Corp., 242 National Master Freight Agreement, 423-428 Nationalization, 309-314 New York Stock Exchange. See Stock markets Newspapers, 615-620

McClellan, John L., 383, 427 McDonald, George E., 616 McDonald v. Santa Fe Trail Transportation Company, 657 McDonald’s restaurants, 396, 398, 851 McKenna, Regis, 611 McNair, Robert “Bob,” 857-859

890

Subject Index Quotas, 761-767

NFL. See National Football League Nickelodeon, 840 Nielsen ratings, 129-134, 839 Nixon, Richard M., 446, 518, 524, 544, 551-587, 589-590, 597 Norris-LaGuardia Act, 115, 186-192, 239, 323-324, 425 North American Free Trade Agreement, 831-836 Noyce, Robert, 671 Nuclear power, 415-422, 647-654 Numerical control, 389-394

Racketeer Influenced and Corrupt Organizations Act, 531-536 Radio broadcasting, 123-128, 224-230 Rail Passenger Service Act, 516-522 Railroads, 309-314, 516-522 Railway Labor Act, 164-169, 171 Reaganomics, 705-711 Reconstruction Finance Corporation, 354-360 Regents of the University of California v. Bakke, 657 Retirement plans, 245-251, 595-601 RICO. See Racketeer Influenced and Corrupt Organizations Act Riordan, Richard, 857 Rios v. Enterprise Association Steamfitters Local 638, 440 Robertson, A. Willis, 486 Rodino, Peter, 778-779

Occupational Safety and Health Act, 551-557 Ohno, Taiichi, 663-664 Oil industry, 7-12, 156-163, 478-483, 588-594, 628-633 Online trading. See E-commerce OSHA. See Occupational Safety and Health Act Ovitz, Michael, 857

S&P. See Standard & Poor index San Francisco Police Officers’ Association v. City and County of San Francisco, 765 Savings and loans, 691-697, 802-808 SBA. See Small Business Administration Schechter Poultry Corp. v. United States, 212 SEC. See Securities and Exchange Commission Securities and Exchange Commission, 217-223 Securities Exchange Act, 217-223 Seniority systems, 747-753 Service economy, 395-400 Servicemen’s Readjustment Act, 301-308 Sherman Antitrust Act, 60-63, 95, 101, 104, 107, 111, 186, 188, 190, 370 Shingo, Shigeo, 663 Simpson-Mazzoli bill, 776-782 Sinclair, Upton, 16, 35-37 Small Business Administration, 354-360 Snyder, Ralph, 335, 337, 339 Social Security Act, 245-251 Sony, 809-815 Spindletop oil field, 7-12, 62

Packard, Vance, 485 Panama Canal, 88-93 Parental leave, 641-646 Parsons, John, 391-392 PATCO. See Professional Air Traffic Controllers Organization Phillips v. Martin Marietta Corporation, 411 Pitney, Mahlon, 114 Postal Reorganization Act of 1970, 573-580 Pregnancy Discrimination Act, 641-646 Price controls, 287-294 Price supports, 172-178 Product safety, 33-39, 375-381, 471-477, 491-502, 509-515, 581-587 Professional Air Traffic Controllers Organization, 719-725 Programmable machines, 389-394 Proxmire, William, 486, 603 Prudhoe Bay, Alaska, 478-483, 628-633 Public Health Cigarette Smoking Act, 523-530 Public Law 480, 361-367 Pure Food and Drug Act, 16, 33-39, 67; amendments, 68

891

Landmarks in Modern American Business United States v. Darby Lumber Company, 277 United States v. Hutcheson, 189 United States v. Paradise, 765 United Steelworkers of America v. Weber, 655-661, 762 Unsafe at Any Speed, 471-477 U.S. Post Office Department, 573-580 U.S. Postal Service, 573-580

Sports Broadcast Act, 859 Standard & Poor index, 852, 854 Standard Oil Company, 60-66 Standard Oil v. United States, 60-66 Steiger, Paul E., 853 Steinbrenner, George, 859 Stock markets, 1-6, 179-185, 217-223, 783-795, 850-855 Strikes, 719-725 Sullivan, Leonor, 486 Supply-side economics, 705-711 Swift & Company v. United States, 102

Wall Street Journal, The, 1-6; and Dow Jones Industrial Average, 850-852, 854 Wall, Danny M., 804-805 Ward’s Cove Packing Co. v. Atonio, 751 Webb, E. Y., 113 West Coast Hotel v. Parrish, 136, 139 White-collar crime, 531-536, 768-775, 789-795 Wilson, Woodrow, and Clayton Antitrust Act, 101, 103-106; and Federal Reserve Board, 82; and Federal Tariff Commission, 117-121; and Federal Trade Commission, 24, 95-96; and labor law, 23, 111-113 Working conditions, 26-32, 54-59, 436-442, 551-557, 565-572, 641-646, 683-690, 719-725, 816-823 World Food Congress, 503-508 World War I, 58, 85, 113, 209, 211; and communications technology, 281; and labor movement, 168; and Panama Canal, 91; and petroleum, 157; reparations, 317; veterans, 303; and Wilson, Woodrow, 106 World War II, 271, 288, 295; and communications technology, 283; and labor movement, 190; and petroleum, 161; veterans, 301-308 World Wide Web, 844-849 Wygant v. Jackson Board of Education, 750, 762

Taft-Hartley Act, 322-328 Tariffs, 117-122, 329-334 Tax law, 117-122, 429-435, 705-711 Teamsters Union, 423-428 Teamsters v. United States, 749 Teapot Dome scandal, 156-163 Telecommunications Reform Act, 839 Telecommuting, 683-690 Telephone systems, 621-627, 734-739 Television broadcasting, 224-230, 280-286, 698-704, 837-843; and sports, 859 Television ratings, 129-134, 839 Tennessee Electric Power Company v. T.V.A., 198 Tennessee Valley Authority, 193-200 Three Mile Island, 647-654 Ticketmaster, 845 Time Magazine, 844-849 Time Warner Cable, 837, 840 Toys, 509-515 Trade agreements, 329-334, 831-836 Trade deficits, 558-564 Trans-Alaskan pipeline, 628-633 Triangle Shirtwaist Factory fire, 54-59 Truax v. Corrigan, 188 Truth in advertising, 67-72 Turner, Robert Edward “Ted,” III, 838 Turner Broadcasting System, 837, 839 TVA. See Tennessee Valley Authority

Yellow dog contracts, 30, 113, 168-169, 186-187, 190, 240 Y2k crisis, 862-867

Union corruption, 382-388 Unionization, 186-192, 238-244, 259-265, 368-374

892